# UNITED STATES TAX COUR T

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

134 T .C . No . 1 1

UNITED STATES TAX COUR T

INTERMOUNTAIN INSURANCE SERVICE OF VAIL, LIMITED LIABILITY
COMPANY, THOMAS A . DAVIES, TAX MATTERS PARTNER, Petitioner v .
COMMISSIONER OF INTERNAL REVENUE, Respondent *

Docket No . 25868-06 .

Filed

May

6,

2010 .

R filed a motion .to vacate the Court's prior
decision and a motion to reconsider the Court's prior
opinion . R's motions are premised on the retroactive
application of temporary regulations issued after the
Court issued its opinion and entered its decision .
Held : R's motions to reconsider and to vacate
will be denied .

Steven R Anderson , for petitioner .

Gary J .'Merken , for respondent .

.*This opinion supplements our previously filed opinion in .
Intermountain Ins . Serv . of Vail, LLC v . Commissioner , T .C . Memo .
2009-195 .

SERVED May 06 2010

SUPPLEMENTAL OPINIO N

WHERRY,

Judge : We issued an opinion and entered our

decision in this case on . September 1, 2009 . Relying on
Bakersfield Energy Partners, LP v . Commissioner , 128 T .C . 207
(2007), affd . 568 F .3d 767 (9th Cir . 2009), we decided that the
adjustments made in respondent's final partnership administrative
adjustment (FPAA) on which this case is based are barred by the
general 3-year period of limitations in section 6501(a) .1 See
Intermountain Ins . Serv . of Vail, LLC v . Commissioner , T .C . Memo .
2009-195 . Respondent subsequently issued two temporary
regulations, sections 301 .6229(c)(2)-iT and 301 .6501(e)-1T,
Temporary Proced . & Admin . Regs ., 74 Fed . Reg . 49322-49323 (Sept .
28,

2009),

and on the basis of the application of those temporary

regulations to this case, filed motions to vacate our decision
and to reconsider our opinion .2 The sole issue now before th e

'Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the year at issue, and all Rule references are to the Tax Court
Rules . of Practice and Procedure .
2In our Sept . 1, 2009, opinion, we noted that, although
.respondent argued that sec .6501(e)(1)(A) applied, his argument s
suggested that he meant to cite sec . 622 .9(c)(2) instead . . See
Intermountain Ins . Serv . of Vail, LLC v . Commissioner , supra n .3 .
Sec . 6501(e)(1)(A) extends the 3-year period of limitations for
assessing tax to 6 years from the due date or the date of the tax
return, whichever is later . See sec . 6501(a) . For tax
attributable to a partnership item, the period of limitations
remains open at least for 3 years after the date the partnership
return was filed or 3 years after the last day, disregardin g
(continued . . .)

Court is whether the temporary regulations compel us to gran t
respondent's motions .
Background ,
The transactions at the heart of this case took place i n
1999 and were reported on the 1999 Form 1065, U .S . Partnership
Return of Income, of Intermountain Insurance Service of Vail, LLC
(Intermountain), filed on September 15, 2000 . The details of the
transactions are largely irrelevant to the issues we face today .
Suffice it to say that in the previously mentioned FPAA that
respondent issued on September,14, 2006, respondent determine d

2 ( . . . continued )
extensions, for filing the partnership return, whichever i's
later . See sec . 6229(a) . Sec . 6229(c)(2) extends the sec .
6229(a) period . Although'there is no period of limitations
within which the Commissioner must issue an FPAA, partnership
item adjustments made in an FPAA are time barred at the partner
level if the FPAA is not issued within the applicable period of
limitations for assessing tax against a partner attributable to
partnership items . See generally Curr-Spec Partners, L .P . v .
Commissioner , 579 F .3d 391 (5th Cir . 2009), affg . T .C . Memo .
2007-289 ; Rhone-Poulenc Surfactants & Specialties, L . .P . v .
Commissioner , 114 T .C . 533, 534-535, 542 (2000) .
Respondent has not provided support for his argument that
sec . 6501(e)(1)(A) or sec . 301 .6501(e)-1T, Temporary Proced . &
Admin . Regs ., 74 Fed . Reg . 49322-49323 (Sept . 28, 2009), applies .
to this case . Respondent has only addressed an omission from
Intermountain's partnership return and time periods running from
the filing of that return . Nevertheless, the parties refer to
the temporary regulations in tandem . Respondent states in his
motion to reconsider that "The temporary regulations apply to
petitioner's 1999 tax year" . For the purposes of this Opinion,
and because sec . 6501(e)(1)(A) and sec . 301 .6501(e)-1T, Temporary
Proced . & Admin . Regs ., supra , could affect the outcome of this
case if a partner's period of limitations was still open when the
FPAA was issued, we will follow the parties' lead and refer to
the temporary regulations in tandem .

that the transactions characterized as a tax shelter "were a
sham, lacked . economic substance and * * * [had] a principal
purpose of * * * [reducing] substantially the present value
of * * * [Int .ermountain's] partners' aggregate federal tax
liability" . Critically, respondent's determination revolved
around Intermountain's alleged overstatement-of partnership
basis .
Petitioner timely petitioned this Court for review of the
FPAA and moved for summary .judgment on the ground that respondent
had issued the FPAA beyond the general 3-year period of
limitations for assessing tax against Intermountain's partners .
See secs . 6229(a), 6501(a) . Respondent conceded that the 3-year
limitations period had expired but argued that an extended 6-year
period . of limitations applied instead as a result of
Intermountain's basis overstatement .3 See secs . 6229(c)(2) ,

3The bar of the period of limitations is an affirmative
defense, and petitioner bore the burden of proof . See Rules 39,
142(a) ; see also Hiahwood Partners v . Commissioner , 133 T .C . _,
- (2009) (slip . op . at 14) . Petitioner established a prima facie
case that the general 3-year period of limitations had .expired as
of the date the FPAA was issued in this case, and respondent
conceded as much . Accordingly, and because respondent never
suggested any other reason why the period of limitations with
respect to any partner remained open, the burden of going forward
shifted to respondent to establish that there was a greater-than25-percent omission of gross income on a partner's or the
partnership's return . See Highwood Partners v . Commissioner ,
supra at - (slip op . .at "14) ; see also Intermountain Ins . Serv .
of Vail v . Commissioner, LLC , supra n .2 .

6501(e)(1)(A) . A dispute over the proper interpretation of
sections 6229(c)(2) and 6501(e)(1)(A) ensued .
Generally, a-6-year limitations period is triggered when a
taxpayer or partnership "omits from gross income an amount
.properly includible therein which is in excess of 25 percent o f
the amount of gross income stated in the return" . Sec .
6501(e)(1)(A) (taxpayer) ; see sec . 6229(c)(2) .(partnership) . The
focus of the parties' dispute was whether an overstatement o f
.basis constitutes an omission from gross income for purposes of
triggering a 6-year limitations period .
This was not an issue of .first impression . In Bakersfield
Energy Partners, LP v . Commissioner ,

supra,

we held that a basis

overstatement was not an-omission from gross income for purposes
of sections 6229(c)(2) and 6501 (e) (1) (A) . In reaching ou r
conclusion, we applied the holding of Colony, Inc . v .
Commissioner , 357 U .S . 28,

33 (1958),

in which the Supreme Court

.was faced with identical language in section 6501(e)(1)(A)'s
predecessor--section 275(c) of the Internal Revenue Code o f
1939 . See Bakersfield Energy Partners, LP v . Commissioner ,

supra

at 215 ("We are unpersuaded by respondent's attempt to
distinguish and diminish the Supreme Court's holding in

Colony,

Inc . v . Commissioner " .) . The Supreme Court's holding, as we
described it, was "that the extended period of limitations
applies to situations where specific income receipts have .been

`left out' in the computation . of gross income and not when an
understatement of gross income resulted from an overstatement o f
.basis ."

Id .

at 213 . The Supreme Court had reviewed the

statute's legislative history and determined that Congress had
not intended a basis overstatement to be an omission from gross
income . See Colony, Inc . v . Commissioner ,
We adhered .to our precedent in
LP v . Commissioner ,

supra at 33, 36 .

Bakersfield Energy Partners,

supra , when we issued our September 1, 2009,

opinion in this case . See

Intermountain Ins . Serv . of Vail, LLC

v . Commissioner , T .C . Memo . 2009-195 . Accordingly, in our
September 1, 2009, order and decision, we granted petitioner's
motion for summary judgment and decided that the adjustments in
respondent's FPAA were barred by the general 3-year limitations
period . That was not the end of the matter, however .
On September 24, 2009, less than a month after our order and
decision in this case, respondent and the Treasury Department
issued temporary regulations under sections 6229(c)(2) and
6501(e)(1)(A) . See secs . 301 .6229(c)(2)-1T and 301 .6501(e)-1T,
Temporary Proced . & Admin . Regs .,

supra . These temporary

regulations were simultaneously issued as proposed regulations .
See . sec . 7805(e) . On September 28, 2009, notice was published
and comments were sought for sections 301 .6229(c)(2)-1 and
301 .6501(e)-1, Proposed Proced . & Admin . Regs ., see Notice of
Proposed Rulemaking by Cross-Reference to Temporary Regulations,

74 Fed . Reg . 49354 (Sept .• .28, 2009)-, and the temporar y
regulations were published in the Federal Register, see secs .
301 .6229(c)(2)-1T and 301 .6501(e)-1T, Temporary Proced . &-Admin .
.Regs .

supra .
The temporary regulations provide, in pertinent part, that

"an understated amount of gross income resulting from an
overstatement . of unrecovere .d cost or other basis, constitutes a n
omission from gross"income for purposes of *

*

[section s

6229(c)(2) and 6501(e) (1) (A) ] . See secs . . 301 .6229(c) (2) -1T and
301 .6501(e)-1T, Temporary Proced . & Admin . Regs .,

supra . The

interpretation espoused by the temporary regulations runs
contrary to the interpretation adopted by this Court in
Bakersfield Energy Partners, LP v . Commissioner , 128 T .C . 207
(2007), and by the Courts of Appeals for the-Ninth and Federal
Circuits in Bakersfield Energy Partners, LP v . Commissioner , 568
F .3d 767 (9th Cir . 2009),9 and Salman Ranch Ltd . v . United
States , 573 F .3d 1362 (Fed . Cir . 2009), respectively . See T .D .
9466, .2009-43 I .R .B . 551, 552 ("The Treasury Department and the
Internal Revenue Service disagree with these courts that th e

4According to T .D . 9466, 2009-43"I .R .B . 551, 552, the
temporary regulations are consistent with a suggestion by the
U .S . Court of Appeals for the Ninth Circuit in Bakersfield Energy
Partners, LP v . Commissioner , 568 F .3d 767, 778,(9th Cir . 2009),
affg . 128 T .C . 207 (2007), that . ambiguity in the statutory
language may make the statutes susceptible to reinterpretation
through regulations . We address this infra note 24 .

- 8 Supreme Court ' s reading of the predecessor to section 6501(e) in
Colony applies to sections 6501 ( e)(1)(A) and 6229 ( c)(2) .") .
Bolstered by the temporary regulations ,
October 16 ,

2009 ,

respondent, on

lodged--and on November 25, . 2009 ,

was permitte d

to file-- an otherwise late'motion to vacate our September 1 ,
2009, decision and a motion .to reconsider our September 1, 2009,
opinion . As the moving party, respondent bears the burden of,
proving entitlement to relief . See Kraasch v . Commissioner , 70
T .C . 623, 626 (1978) . Respondent urges us .to reconsider the
case, this time eschewing our prior precedent in .favor of the
temporary regulations . Petitioner counters that the temporary
regulations are either inapplicable, invalid, or otherwise not
entitled to deference . On November 25, 2009, we ordered the
.parties to file briefs . Pursuant to our order, the parties filed
opening briefs on January,5, 2010 . Petitioner and respondent
filed reply briefs on January 27 and February 1, 2010,
respectively .

I .

.
Discussion

Motions To Reconsider and To Vacat e
Motions to reconsider and . to vacate are governed by Rules

161 and 162, respectively . Those rules establish filing
deadlines but provide no .guidance on when the Court should grant
or deny such motions . In the absence of more specific guidance,
we look to caselaw and the Federal Rules of Civil Procedure . See
Rule 1(b) .

The decision to grant motions to reconsider and to vacat e
lies within the discretion of the Court .

Estate of Quick v .

Commissioner , 110 T .C . 440, 441 (1998) (motion to reconsider) ;
Kun v . Commissioner , T .C . Memo . 2004-273 (motion to vacate) .
Motions to reconsider are generally "intended to correc t
substantial errors of fact or law arid allow the introduction of
newly discovered evidence that the moving party could not have
introduced by the exercise of due diligence in the prio r
proceeding ."

Knudsen v . Commissioner , 131 T .C . 185, 185 (2008) .

"Reconsideration is not the appropriate forum for rehashin g
previously rejected legal arguments or tendering new . legal
theories to reach the end result desired by the moving party ."
Estate of Quick v . Commissioner ,' supra at 441-442 . Motions to
vacate are generally not granted absent a showing of unusual
circumstances or substantial error,e .g ., mistake, inadvertence,
surprise, excusable neglect, newly discovered evidence, fraud, or
other reason justifying relief .

See, e .g ., Fed . R . Civ . P . 60(b) ;

Brannon's of Shawnee, Inc . v . Commissioner , 69 T .C . 999 (1978) .
Importantly, an intervening change in the law can warrant
the granting of both a motion to reconsider and a motion to
vacate. See Alioto v . Commissioner , T .C . Memo . 2008-185 .5' I n

5See also Servants of the Paraclete v . Does , 204 F .3d 1005,
1012 (10th Cir . 2000) ; Cornell v . Nix , 119 F .3d 1329, 1332-1333
(8th Cir . 1997) ; Matarese v . LeFevre , 801 F .2d .98, 106 (2d Cir .
1986) ; McGrath v . Potash , 199 F .2d 166, 167 (D .C . Cir . 1952) .

- 10 .Alioto v . Commissioner , T .C . Memo . 2006-199, the Court held that
it lacked jurisdiction over "stand-alone" section 6015(f )
cases . After Congress expanded the Court's jurisdiction to
include such cases, see Tax Relief and Health Care Act of 2006,
Pub . L . 109-432, div . C, sec . 408, 120 Stat . 3061, the taxpayer
filed timely motions to reconsider and to vacate, which the Court
granted . See Alioto v . Commissioner , T .C . Memo . 2008-185 ("We
agree that the Court correctly applied the caselaw as it existed
at the time the Court issued Alioto I ; however, we disagree that
the motion for reconsideration should be denied . After the
Court's decision in Alioto I the law and the Court's jurisdiction
changed ." (Fn . ref . omitted .)) .
Respondent asks us to grant the motion to vacate in the
"interests of justice" so that we "may grant the motion for
reconsideration ." Citing Alioto v . Commissioner , T .C . Memo .
2008-185, respondent further .asserts that the issuance of the
temporary regulations was an "unusual circumstance" warranting
reconsideration of our September 1, 2009, opinion . Petitioner
disagrees and attempts to distinguish Alioto v . Commissioner , .
T .C . Memo . 2008-185, .noting that it involved "an act o f
[C]ongress * * *, not a regulation issued by Respondent, who wa s
a litigant in the case ." Along these lines, petitioner warns
that "Granting Respondent's Motion under the circumstances of
this case would give Respondent license to render litigation

- 11 futile" because "In every case where * * * [respondent] receives
an adverse decision, Respondent could simply restate its [sic]
unsuccessful argument as a .temporary regulation, and then request
reconsideration based upon the temporary regulation . "
Petitioner's concerns are .noteworthy ;6 however, they do not
persuade us to deny respondent's motions without first
considering the applicability and potential impact of the
temporary regulations . Ignoring the temporary regulations at
this time would not dispel the evils envisioned by petitioner .
Indeed, respondent could appeal our September 1, 2009,

,

decision and ask the appellate court to consider the issue of the
temporary regulations in the first .instance . Respondent has
already done so in more than one case .' . By neglecting the
temporary regulations at this time we would not be protecting the
integrity of . the judicial system, as petitioner suggests, but
merely failing to fully complete our work . We see no compelling
reason to wield our discretion to that end . Moreover, w e

'Tax litigation is expensive, and respondent litigates with
taxpayer-provided funds while petitioner and/or the limited
liability company or its members must litigate with their own
funds . If the law is allowed to change retroactively after a
taxpayer has prevailed in one or more courts, thereby rendering .
their victory Pyrrhic, the perverse result will be to
significantly discourage taxpayers from asserting their rights
under the then-existing law .
7See Brief for the Appellant at 14, Salman Ranch, Ltd . v .
Commissioner , No . 09-9015 (10th Cir . Feb . 16, 2010) ; Brief fo r
the Petitioner at 17-18, Commissioner v . M .I .T .A . , No . 09-6082 7

(5th Cir ., Mar .. 3,

2010) .

12 question petitioner's attempt to distinguish Alioto v .
Commissioner , T .C . Memo . 2008-185, in this context .8
Accordingly, we proceed to consider the applicability an d
potential impact of .the temporary regulations to . this case . If,
as petitioner contends, . the temporary regulations do not apply,
are invalid, or are otherwise not entitled to deference, we will
deny respondent's motions because it would be pointless to grant
them . If, on the other hand, the temporary regulations apply,
are valid, and are entitled to deference, we would be required to
ascertain whether, after considering all other factors,
respondent's motions should be granted . We turn first to whether
the temporary regulations apply to this case .
II .

The Applicability of the Temporary Regulation s
The threshold issue in determining whether the temporary

regulations apply to this case is whether the temporary
regulations apply by their own terms . The
"Effective/applicability date" provisions of the temporary
regulations provide that "The rules of this section apply to
taxable years with respect to which the applicable period for
assessing tax did not expire before September 24, 2009 ." Secs .
301 .6229(c)(2)-1T(b) and 301 .6501(e)-1T(b), Temporary Proced . &
Admin . Regs .,

supra .

'See , e .g ., Smiley v . Citibank ( S .D .), N .A . , 517 U . S . 735,
744 n -.3 (1996), which we cited in our Nov . 25, 2009 , order in
this case granting respondent ' s Oct . 16, 2009 , motions for leave
to file out of time the motions to reconsider and to vacate .

13 The starting point for interpreting a regulatory provision
is its plain meaning . See Walker Stone Co . v . Secy . of Labor ,
156 F .3d 1076, 1080 (10th Cir .

1998)

("When the meaning of a

regulatory provision is clear on its face, the regulation must be
enforced in accordance with its plain meaning .") . We concluded
in our September 1, 2009, opinion that the general 3-year
limitations period of section 6501(a) was the applicable period
for assessing tax in this case and that it had expired some time
before September 14,

2006 .

The plain meaning of the

effective/applicability date provisions indicates that,the
temporary regulations do not apply to this case .
Respondent argues to the contrary and in doing so begs the
question9 by advancing a notably convoluted interpretation of the
effective/applicability date provisions :
To determine whether the temporary regulations are
applicable under the effective date provision, the
Court must determine whether a six-year statute of
limitations would be open for the taxable year at
issue, as of September 24, 2009, without regard to wha t
the standard for applying the statute of limitation s

'See IRS Chief Counsel Notice CC-2010-001 (Nov . 23, 2009)
stating :
The temporary regulations apply to taxable years with
respect to which the applicable period of limitations
for assessing tax did not expire before September 24,
2009 . Accordingly, the temporary regulations apply to
any docketed Tax Court case in which the period of
limitations under sections 6229(c)(2) and
6501(e)(1)(A), as interpreted in the temporary
regulations, did not expire with respect to the tax
year at issue, before September 24, 2009, and in which
no final decision has been entered .

- 14 might be . If the six-year limitations period could be
open under some standard .as of September 24, 2009, then
the temporary regulations apply .
Under respondent's interpretation, the Court must depar t
from our precedent in . Bakersfield Energy . Partners, LP v .
Commissioner , 128 T .C . 207 (2007), affd . 568 F .3d 767 (9th Cir .
2009), which held that a 3-year limitations period applies .under
the circumstances of this case . We must then launch a quest for
some hypothetical standard that could trigger a 6-year
limitations period . If we discover such a standard--and the
temporary regulations conveniently supply us with one--then we
must apply that standard to determine whether the period of
limitations in this case could have been open as of September 24,
2009 . If the limitations period could have been open under the
hypothetical standard, then the temporary regulations apply to
this case .
Essentially, the key, according to respondent, is not
whether the limitations period was actually open on September 24,
2009,

under then-applicable law but whether the limitations

period could have-been open on that date under hypothetical law .
Distilled even further, respondent's rationale suggests that the
temporary regulations apply to this case because their
application would trigger a 6-year limitations period .
Respondent had phrased this argument more simply in his motion to
reconsider : "The temporary regulations apply to petitioner's

- 15 .1999 tax year, because the period of limitations under sections
6229(c)(2) and 6501(e)(1)(A),

as interpretated in the

regulations , remains open with respect to that year ." (Emphasis
added .)' °
Ordinarily, an agency's interpretation of its own regulation
is controlling unless it is "plainly erroneous or inconsistent
Auer v . Robbins , 519 U .S . 452, 461 (1997)

with the regulation ."

(internal quotation marks omitted) ." Here, however, the Court
concludes that respondent's interpretation of the temporary
regulations' effective/applicability date provisions is erroneous
and inconsistent with the regulations . Specifically, we find the
interpretation to be irreparably marred by circular, resultdriven logic and the wishful notion that the temporary
regulations should apply to this case because Intermountain was
involved in what he believes was an abusive tax transaction . For
these reasons, we refuse to accord respondent's interpretation
deferential treatment .
The . plain meaning of the,-,temporary regulations'
effective/applicability date provisions indicates that th e

'°See supra note 9 .

.

"See also Ariz . Pub . Serv . Co . v . U .S . EPA , 562 F .3d 1116,
1123 n .5 (10th Cit . 2009) ; Solis v . Summit Contractors, Inc . , 558
F .3d 815, 823 (8th Cit . 2009) ; Estate of Focardi v . Commissioner ,
T .C . Memo . 2006-56 ("Our view is further supported by the wellestablished principle that the judiciary should accord
substantial deference to the .Commissioner's .interpretation of
Treasury regulations" .) .

- 16 temporary regulations do not apply to this case because th e
applicable period of limitations expired before September 24,
.2009 .12 It would therefore be futile to grant respondent's
motions to reconsider and to vacate, both of which are premised
on the application of the temporary regulations to this case .
While the foregoing establishes a plausible ground to rule
against respondent's motions, it becomes compelling when combined
with our discussion below .' 3

12 The Court recognizes that respondent may argue that the
decisions we rely upon, Bakersfield Energy Partners, LP v .
Commissioner , 568 F .3d 767 (9th Cir . 2009), and Salman Ranch Ltd .
v . United States , 573 F .3d 1362 (Fed . Cir . 2009), holding that
the limitations period had expired before Sept . 24, 2009, do not,
in his opinion, make it so . There are 11 other Courts of Appeals
and the Supreme Court still to be heard from, and by accepting as
settled law the Bakersfield and Salman Ranch results our
rationale may, in respondent's view,, also beg the question .
Respondent, however, cites no court authorities equivalent to
those of the appellate court decisions, and although he cites the
temporary regulations, courts have traditionally determined the
meaning of statutes . See Chevron U .S .A . Inc . v . Natural Res .
Def . Council , 467 U .S . 837, 843 n .9 (1984) (stating that "The
judiciary is,the final authority on issues of statutory
construction") . Thus we believe our position is appropriate . We
address in Section III below why in addition to Bakersfield
Energy Partners, LP v . Commissioner , supra , and' Salman Ranch Ltd .
v . United States , supra, we conclude that the 3-year limitations,
period applied to this case before Sept . 24, 2009 .
13We also recognize that respondent could amend the
temporary regulations' effective/applicability date provisions
and file renewed motions to reconsider and to vacate based on
those amended provisions, thereby extending this dispute to yet
another case . See Murrell v . Shalala , 43 F .3d 1388, 1389 (10th
Cir . 1994) .

- 17 III .

Judicial Deferenc e
We next turn to whether the temporary regulations, if

applicable, deserve judicial deference . Courts have long held
that Federal tax regulations are entitled to some degree of
deference .. This is in recognition of the fact that "Congress has
delegated to the [Secretary of the Treasury and his delegate,
the] Commissioner [of Internal Revenue], not to the courts, the
task of prescribing all needful rules and` regulations for the
enforcement of the Internal Revenue Code ."

Natl . Muffler Dealers

Association, Inc . v . United States , 440 U .S . 472, 477 (1979)
(internal quotation marks omitted) . Yet, the exact amount of
deference owed to Federal tax regulations remains a source of
debate .
Petitioner asserts- that the temporary regulations are only
entitled to deference under

Skidmore v . Swift & .Co .,

323 U .S .

134, 140 (1944), because they are interpretive regulations .
Respondent counters that the more deferential standard in

Chevron

U .S .A . Inc . v . .Natural Res . Def . Council , 467 U .S . 837, 842-843
(1984), applies and that, if not, then the temporary regulation s
at least fall under Natl Muffler Dealers Association, Inc .
need not resolve the parties' dispute on this issue because, even
I
if the temporary regulations are entitled to review under

18 Chevron , they face a formidable obstacle to deference-- Colony,
Inc . v . Commissioner , 357 U .S .

28

(1958) .1 4

The temporary regulations were not issued on a blank slate .
In its 1958 opinion in Colony, Inc . , the Supreme Court
interpreted the same statutory language and held that a basis
overstatement was not an-omission from gross income .

Id .

More

than 50 years later, respondent and the Treasury Department
issued the temporary regulations and reached the opposit e
conclusion . The question is whether we are bound by the agency's
construction of the statute in the temporary regulations or by
the Supreme Court's prior determination of congressional intent
and the Internal Revenue Code' .s requirements, as set forth i n

"Respondent maintains that Colony, Inc . v . Commissioner ,
357 U .S . 28 (1958), does not control the interpretation of secs .
6229(c)(2) and 6501(e)(1)(A), see T .D . 9466, supra, and that, in
any event, the Supreme Court's and respondent's constructions are
not necessarily inconsistent . We held otherwise in Bakersfield
Energy Partners, LP v . Commissioner , 128 T .C . 207 (2007), and in
our Sept. 1, 2009, opinion in this case . See Intermountain Ins .
Serv . of Vail, LLC v . Commissioner , T .C . Memo . 2009-195 . We
rejected respondent's arguments in the process, and rehashing
them now even in this context is not necessary . See Estate of
Quick v . Commissioner , 110 T .C . 440, 441 (1998) . As we noted
previously, we are hesitant to contradict the Supreme Court's
ruling in Colony . See Intermountain Ins . Serv . of Vail, LLC v .
Commissioner , supra n .5 . The Supreme Court has advised lower
courts that "If a precedent of this Court [the Supreme Court] has
direct application in a case, yet appears to rest on reasons .
rejected in some other line of decisions, the * * * [lower
courts] should follow the case which directly controls, leaving
to this•Court .the prerogative of overruling its own decisions ."
Rodriguez de Ouijas v . Shearson/Am . Express, Inc . , 490 U .S . 477,
484 (1989) . We rule that our analysis here of the legislative
history behind the Colony decision provides further, and we
believe determinative, support for those opinions .

19 - .
Colony, Inc .

Assuming respondent is correct that the temporary

regulations are entitled to Chevron deference, the answer to this
question lies in Natl . Cable & Telecomms . Association v . Brand X
Internet Servs . , 545 U .S . 967, 982 (2005) .
"A court's prior judicial construction of a statute trumps
an agency construction otherwise entitled to

Chevron deference

only if the prior court decision holds that its construction
follows from the unambiguous terms of the statute and thus leaves
no room for agency discretion ."

Brand X ,

supra at 982 . In so

holding, the Supreme Court reasoned as follows :
[A]llowing a judicial precedent to foreclose an agency
from interpreting an ambiguous statute * * * would
allow a court's interpretation to override an agency's .
Chevron 's premise is that it is for agencies, not
courts, to fill statutory gaps . * * * The better rule
is to hold judicial interpretations 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 : Only a
judicial precedent holding that the statute
unambiguously forecloses the agency's interpretation,

- 20 and therefore contains no gap for the agency to fill,
displaces a conflicting agency construction .
.

Id .

at 982-983 .1 s
We are therefore directed to apply

Chevron step one by

determining whether the Supreme Court in Colony ,

Inc . v .

Commissioner ,

supra ,

found the statutory provision at issue to be

unambiguous .

If so ,

there . is no gap left for the temporary

regulations to fill with respect to the statutory provisions at
issue here .

The first step in Chevron ' s two - step analysis is to

ask "whether Congress has directly spoken to the precise question
at issue ."

Chevron U .S .A . Inc .

v . Natural Res . Def . Council ,

supra at 842 . "If the intent of Congress is clear, that is the
end of the matter ,

for the court ,

as well as the agency ., mus t

15In a concurring opinion, Justice Stevens suggested that
this holding "would not necessarily be applicable to a decision
by this Court that would presumably remove any pre-existing
ambiguity ."
Natl . Cable & Telecomms . Association v . Brand X
Internet Servs . , 545 U .S . 967, 1003 (2005) (Stevens, J .,
concurring) . Justice Stevens' suggestion has indeed sparked
debate over the applicability of Brand X . Although that debate
is still largely open, we note, without approval or disapproval,
that the U .S . Court . of Appeals for the Tenth Circuit has held
that Brand X does apply when the prior judicial construction is
the Supreme Court's . See Hernandez-Carrera v . Carlson , 547 F .3d
1237, 1248 (10th Cir . 2008) ("[W]e conclude that the holding of
Brand X applies whether the judicial precedent . at issue is that
.of a lower court or the Supreme Court .") .

21 give effect to the unambiguously . expressed intent of Congress .
Id .

at 842-843 .
When determining . Congress' intent,

Chevron instructs us to

employ "traditional tools of statutory construction ."

Id .

.at .843

n .9 . Many courts, including the Courts of Appeals to which this
case might be appealed," have accepted the use of legislative
history as an important element in

Chevron step one . See, e .g .,

Anderson v . U .S . Dept . of Labor , 422 F .3d 1155, 1180 (10th Cir .
2005) ("To .determine whether Congress had an intent on the
precise question at issue, courts utilize the traditional tools '

16The second step of Chevron specifies as follows :
If, however, the court determines Congress has not
directly addressed the precise question at issue, the
court does not simply impose its own construction on . .
the statute, as would be necessary in .the absence of an
administrative interpretation . Rather, if the statute
is silent or ambiguous with respect to the specific
issue, the question . for the court is whether the
agency's answer is based on a permissible construction
of the statute . . [Fn . refs . omitted . ]
Chevron U .S .A . Inc . v . Natural Res . Def . Council , 467 U .S . at
843 .
17In our Sept . 1, 2009, opinion, we indicated that, absent
stipulation to the contrary, this case may be appealable totthe
Court of Appeals for the Eighth, Tenth, or D .C . Circuit . See
Intermountain Ins . Serv . of Vail, LLC v . Commissioner , T .C . Memo .
2009-195 n .4 (citing Golsen v . Commissioner, 54 T .C . 742, 757
(1970), affd . 445 F .2d 985 (10th Cir . 1971)) . We . did not answer
Id .
the question of proper venue and do not do so now .

22 of statutory construction, including the statutory language and
legislative history .") . 1 8
Therefore, in determining whether the Supreme Court in
Colony, Inc . v . Commissioner , 357 U .S .

-28 (1958), found the

statutory provision at issue to be unambiguous, we will conside r
the court's analysis of both the statutory language and its
legislative history .19 Respondent calls attention to the Suprem e

18See Catawba County v . EPA , 571 F .3d 20, 35 (D .C . Cir .
2009) ("To be sure, a statute may foreclose an agency's preferred
interpretation despite such textual ambiguities if its structure,
legislative history, or purpose makes clear what its text leaves
opaque .") ; North Dakota ex rel . Olson v . Ctrs . for Medicare &
Medicaid Servs . , 403 F .3d 537, 539-540 (8th Cir . 2005) ; see also
Miccosukee Tribe of Indians v . United States , 566 F .3d 1257, 1273
(11th Cir . 2009) ; New York v . U .S . Dept . of Health & Huma n
Servs .' Admin . for Children & Families , 556 F .3d 90, 97 (2d Cir .
2009) ; Natural Res . Def . Council v . U .S . EPA , 526 F .3d 591, 603
(9th Cir . 2008) ; Wheatland Tube Co . v . United States , 495 F .3d
1355, 1359-1360 (Fed . Cir . 2007) ; Succar v . Ashcroft , 394 F .3d 8,
22-23 (1st Cir . 2005) . But see United States v . Geiser , 527 F .3d
288, 292 (3d Cir . 2008) ; Bankers Life & Cas . Co . v . United
States , 142 F .3d 973, 983 (7th Cir . 1998) .
The Supreme Court has sent mixed signals about the use of
legislative history in Chevron step one . In Chevron itself, the
Court considered legislative history as part of step one .
Chevron U .S .A . Inc . v . Natural Res . Def . Council , 467 U .S . at
862 . It has continued to do so in more recent opinions,, and we
deduce that . it intends to continue this practice . See Gen .
Dynamics Land Sys ., Inc . v . Cline , 540 U .S . 581, 587-590, 600
(2004) ; see also Zuni Pub . Sch . Dist . No . 89 v . Dept . of Educ . ,
550 U .S . 81, 90-91 (2007) . Nevertheless, on occasion, .the Court
has stopped short of employing traditional tools of statutory
construction, including legislative history . See Negusie v .
Holder , 555 U .S .
129
S . Ct . 1159, 1183 (2009) (Thomas,
J ., dissenting )
19Although we have found no opinion in which a court
considered legislative history when applying Brand X , we see no
reason why a court--if it considers legislative history whe n
(continued . . .)

23 .Court's statement that "Although we are inclined to think that
the statute on its face lends itself more plausibly to the
taxpayer's interpretation, it cannot be said that the language is
unambiguous . ii 20

Colony, Inc . .v . Commissioner ,

supra at 33 . In

doing so, respondent ignores the Supreme Court's subsequent
review of, and reliance on, the statute's legislative history .
Although the Supreme Court initially found the statutory
provision ambiguous, that was only a preliminary conclusion
before considering . the statute's legislative history . After
thoroughly reviewing the legislative history,21 the Supreme Court
concluded that Congress' intent was clear and that the statutory
provision was unambiguous .

Id .

at 33, 36 .

Specifically, the Supreme Court found the legislative
history to be "persuasive evidence that Congress was addressing
itself to the specific situation where a taxpayer actually
omitted some income receipt or accrual in his computation of
gross income, and not more generally to errors in tha t

19 ( . . . continued )
applying Chevron step one--would not also consider it when
applying Brand X .
20Both parties also refer to the Supreme Court's observation
that "the conclusion we reach is in harmony with the unambiguous
language of § 6501(e)(1)(A) of the, Internal Revenue Code o f
1954 ."
Colony, Inc . v . Commissioner , 357 U .S . at 37 . We decline
both parties' requests to attach meaning to that statement .
21Hearings Before the House Comm . on Ways and Means, 73d
Cong ., 2d Sess . 139, 149 (1934) ; H . Rept . 704, 73d Cong ., 2d
Sess . 35 (1934), 1939-1 C .B . (Part 2) 554, 580 ; S . Rept . 558, 73 d

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

- 24 computation arising from other causes ."

Id .

at 33 (emphasis

added) It further indicated that "this history shows to our
satisfaction that the Congress intended an exception to the usua l
three-year statute of limitations only in the restricted type of
situation already described [an omission of an item of gross
income] ."

Id .

at 36 . "We think that in enacting § 275(c)

Congress manifested no broader purpose than to give the
Commissioner an additional two years to investigate tax returns
in cases .where, because of a taxpayer's omission to report some
taxable item, the Commissioner is at a special disadvantage in
detecting errors ."

Id .

In so holding, the Supreme Court found that the .statute's
legislative history clarified its otherwise ambiguous text and,
as a result, explicated Congress' intent and the meaning of the
statutory provision . Thus, the Supreme Court's opinion i n
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 .2 2

. 22We recognize that Colony, Inc . v . Commissioner , 357 U .S .
28 (1958), predated both Chevron U .S .A . Inc . v . Natural Res . Def .
Council , supra , and Natl . Cable & Telecomms . Association v . Brand
X Internet Servs . , supra , so that the Supreme Court could not
have been aware of the standards against which its opinion would
be tested . We agree, however, with the U .S . Court of Appeals for
the Fourth Circuit, which stated that "[w]e * * * do not hold
that a ..court must say in so many magic words that its holding is
the .only permissible interpretation of the statute in order for
that holding to be binding on an agency ."
Fernandez v . Keisler ,
(continued . . .)

- 25 See Natl . Cable & Telecomms . Association v . Brand X Internet
Servs . ,

S23
supra at 983 . Consequently, the temporary regulation

are invalid and are not entitled to deferential treatment .2 9

22 ( . .
. continued )

502 F .3d 337, 347 (4th Cir . 2007 )
23See supra note 2 ; Intermountain Ins . Serv . of Vail, LLC v .
Co mm issioner , T .C . Memo . 2009 -195 n . .3 .
24 Respondent suggests that the U .S . Court of Appeals for the
Ninth Circuit, in Bakersfield Energy Partners, LP v .
Commissioner , 568 F .3d 767 (9th Cir . 2009), invited respondent to
issue the temporary regulations . The Court of Appeals
acknowledged that the Supreme Court in Colony, Inc . v .
Commissioner , supra , found sec . 275(c) to be ambiguous and .stated
that "The IRS may have the authority to promulgate a reasonable
reinterpretation of an ambiguous provision of the tax code, even
if its interpretation runs contrary to the Supreme Court's
Bakersfield
`opinion as to the best reading' of the provision ."
at
778
(quoting
Natl .
Energy Partners, LP v . Commissioner ,' supra
,
545
Cable & Telecomms . Association v . Brand X Internet Servs .
U .S . at 983) .
The Court of Appeals did not indicate definitively whether
any such temporary regulations would actually trump the Supreme
Court's prior judicial construction . This may flow from the
possibly unresolved issue of whether legislative history should
be considered when applying Chevron step one . Compare Natural
Res . Def . Council v . U .S . EPA , supra at 603 ("An examination of
the statutory language and its legislative history assists us in
this inquiry [ Chevron step one]" .), with Schneider v . Chertoff ,
450 F .3d 944, 955 n .15 (9th Cir . 2006) ("Although we cannot
consider legislative history under the first prong of Chevron ,
* * we note that the Secretary's regulation subverts the very
intent of the Nursing Relief Act .") . In any event, we will not
speculate as to the precise meaning of the Court of Appeal's
statement, particularly when, as in this case , we are not bound
by that court' s caselaw because this case is not appealable,
absent stipulation to the contrary, to that court . See Golsen v .
Commissioner , 54 T .C . at 757 .

26 IV .

Retroactivit y
We next turn to petitioner's concern that the temporary

regulations would have an impermissible retroactive effect if we
applied them in this case . Respondent attempts to defuse
petitioner's concern by arguing that the temporary regulation s
are not . retroactive . as applied in this case" but that, even if
they were, they would be permissibly retroactive . Thus, two
issues emerge : First, whether the temporary regulations would
have a retroactive effect if applied in this case, and second, if
so, whether the retroactive effect would be permissible .
However, in the light of our holdings above regarding the
regulations' effective date and their validity, we need not
answer these questions to resolve respondent's motions in this
case . We therefore leave them for another day .
Conclusion
In light of the above holdings, we find it . unnecessary to
address petitioner's other concerns with respect to the temporary
regulations . The . Court, has considered all of respondent's
contentions, arguments, requests, and statements . To the extent,
not discussed herein, we conclude that they are meritless,moot,
or irrelevant .

- 27 To reflect the foregoing,

An appropriate order wil l
be issued .
Reviewed by the Court .
COLVIN, WELLS, VASQUEZ, GOEKE, KROUPA, and PARIS, JJ .., agree
with this majority opinion .
GUSTAFSON and MORRISON ., JJ ., did not participate in the
consideration of this opinion .

28 COHEN, J ., concurring : I concur in the result in this case .
I would reach the same result, however, on narrower grounds
relating to motions to vacate and reconsider or untimely motions
to amend pleadings . Moreover, I would adopt petitioner's
distinction of Alioto v . Commissioner , T .C . Memo . 2008-185,
emphasizing the difference between congressional action there and
what occurred here .
I would defer discussion of the difficult and divisive
issues regarding retroactive regulations, temporary regulations
promulgated without notice and an opportunity for comment, and
the degree of deference to which these regulations and Treasury
.regulations generally are entitled . Many cases to be decided in
the future, including those now on appeal, will 'necessarily
present those issues . This petitioner should not bear the burden
of relitigating this case on a playing field unilaterally
redesigned by the adverse party after petitioner has prevailed at
this level .
GALE, THORNTON, and MARVEL, JJ ., agree with this concurring
opinion .

- 29
HALPERN andHOLMES, JJ ., concurring in the result only :
I . . Introductio n
Respondent asks that, "in the interests of justice", we
vacate our order and decision so~ .that we may reconsider our
opinion "to correct a substantial error of law" resulting from
the "unusual circumstance" :of the Secretary's issuing temporary
regulations ostensibly overruling the authority on which we
relied 23 days, earlier in deciding this case .' Understandably,
petitioner cries foul, arguing first and foremost that respondent
cannot meet the high standards established by . this Court for
granting either a motion to vacate, see Taylor v . Commissioner ,
T .C . Memo . 1987-403, or a motion to reconsider, see

Estate of

Quick v . Commissioner , 110T .C . 440, :441 (1998) . The majority
finds no reason to resolve the merits of that argument, however,
because, it says, even if it were to deny .the motions on that
ground, respondent might appeal our decision and, "[b]y
neglecting the temporary regulations at this time[,] we would . not
be protecting the integrityof the judicial system,* .* .bu
*
t
merely failing to fully complete our work ." Majority op .

P.

11 .

The majority then proceeds to hold that the temporary regulations
are both . prospective (and therefore inapplicable to this case )

'The temporary regulations in question (the temporary
regulations) . are secs . 301 .6229(c)(2)-1T and 301 .6501(e)-1T,
Temporary Proced . & Admin . Regs ., 74 Fed . Reg . 49322 (Sept . 28,
.2009) .

30
and, because they are unambiguously in conflict with the statute,
invalid . Principles of judicial restraint counsel against making
.unnecessarily broad pronouncements when a case can be fully
resolved on a narrower ground . Cf .

Greater New Orleans Broad .

. Association Inc . v .'United States , 527 U .S . 173, 184 (1999 )
(discussing constitutional interpretation) . Moreover, b y
discrediting the substance of the temporary regulation s
themselves, the majority has assured petitioner'a trip to a-Court
of Appeals that he might avoid were we simply to stamp the
motions denied or to dispose of them on grounds particular to
this case, as Judge Cohen suggests . 2
Since the majority has chosen to address the effective date
of the temporary regulations and their substantive validity, we
feel compelled to comment . We are persuaded by neither of the
majority's analyses and would, before addressing any aspect of
substantive validity,=consider first the logically prior question
of the procedural validity of the temporary regulations . With
respect to that question, we believe that petitioner has the
better argument .

2In its haste to protect the integrity of the judicial
system and to fully complete its work, the . majority "question[s]"
petitioner's attempts to distinguish Alioto v . Commissioner , T .C .
Memo . 2008-185, but it does not stop to explain or . to resolve
those questions . Majority op . pp . 11-12,

- 31 II .

Applicability of the Temporary Regulation s
The majority concludes : "The plain . meaning of the

effective/applicability date provisions indicates that the
temporary regulations do not apply to this case ." Majority op .
p . 13 . In fact, the temporary regulations provide : . "The rules
of this section apply to taxable . years with respect to which the
applicable period for assessing tax did not expire befor e

September 24, 2009 ." Secs . 301 .6229(c)(2)-1T(b),

301 .6501(e) -

1T(b),

Temporary Proced .

& Admin . Regs ., 74 Fed .

49323

(Sept . 28, 2009) .

The relevant dates are as follows :

Tax year
Return filed
FPAA mailed
Petition filed
Order/Decision
Temp . Regs . effective date

Reg . 49322 ,

199 9
Sept .

15,

200 0

Sept .
Dec .
Sept .
Sept .

14,
4,
1,
24,

200 6
200 6
200 9
200 9

Section 6229(a) provides that, except as otherwise provided
in the section, the period of limitations for making assessments
with respect-to partnership items,is 3 years . Section 6229(c)(2)
substitutes 6 years for 3 years in the case of a substantia l
omission of income . The period for making assessments--whether 3
years or 6 years--is suspended by the mailing of an FPAA until
our decision in the case becomes final (or, if no petition is
filed, the period to petition expires) and for 1 .year thereafter .
See sec . 6229(d) . Because of respondent's motion to vacate order
and decision, our decision in this case has not yet become final .

- 32 The majority claims : "The plain meaning of the temporary
regulations' effective/applicability date provisions indicates
that the temporary regulations do not apply to this case because
the applicable period of limitations expired before September 24,
2009 ." Majority op . pp . 15-16 . According to respondent, the
applicable period of limitations did not expire before . September
24, 2009, because, as a result of the .temporary regulations, "the
applicable period for assessing tax" is the 6-year period
prescribed by section 6229(c)(2), which 6-year period had not run
on September 14, 2006, when the FPAA was mailed . The filing of
the petition then suspended the running of that 6-year period to
and beyond September 24, 2009 . The majority counters : "We
concluded in our September 1, 2009, opinion [which antedates the
September 24, 2009, temporary regulations] that the general 3year limitations period of section 6501(a) was the applicable
period for assessing tax in this case and that it had expired
some time before September 14, 2006 ." Majority op . p . 13 . It
adds : "The plain meaning of the effective/applicability date
provisions indicates that the temporary regulations do not apply
to this case ." Majority op . p . 13 .
Since the temporary regulations do not define the term
"applicable period for assessing tax" (by stating whether the
regulation itself is to be taken into account in determining the
applicable period), the meaning of the term is less than plain,

- 33
so it must be construed . What ground is there, then, for the
majority to conclude that the effective date language of the
temporary regulations precludes their application to : this case?
In other words, how can it construe the expression "the
applicable period for assessing tax" to mean "the 3-year period
for assessing tax"? Perhaps the . majority has in mind section
7805(b), as applicable to the temporary regulations .3 As so
applicable, the section reads :
SEC . 780.5(b) . Retroactivity of Regulations or
Rulings .--The Secretary may .prescribe the extent, if
any, to which any ruling or regulation, relating to th e
internal revenue laws, shall be applied without
retroactive effect . [Sec . 7805(b) (pre-1996) . ]
We have said : "Under section 7805(b) [pre-1996], there is a
.presumption that every regulation will operate retroactively,
unless the Secretary specifies otherwise ."

UnionBanCal Corp . v . .

Commissioner , 113 T .C . 309, 327 (1999), affd . 305 F .3d 976 (9th
Cir . 2002) : Here, undoubtedly, the Secretary did specif y

3In 1996, sec . 7805(b) was amended by the Taxpayer Bill of
Rights 2, Pub . L . 104-168, sec . 1101(a), 110 Stat . 1468 (1996),
to limit the retroactive application . of Treasury tax regulations .
The 1996 amendment is effective with respect to regulations that
relate to statutory provisions enacted on or after July 30, 1996 .
See id . sec . 1101(b), 110 Stat . 1469 . The parties seem to agree
(and the majority does not dispute) that the 1996 amendment does
not apply to the temporary regulations since the statutory
provisions in question, secs . 6229(c)(2) and 6501(e)(1)(A), were
enacted before that date . Sec . 301 .6229(c)(2)-1T, Temporary
Proced . & Admin . Regs ., supra , was issued under the authority of
both secs . 6230(k) and 7805, while sec . 301 .6501(e)-1T, Temporary
Proced . & Admin . Regs ., supra , was issued solely under the
authority of sec . 7805 . T .D . 9466, 74 Fed . Reg . 49322 .

- 34 something with respect to the retroactivity (applicability) of
the temporary regulations ; viz, the rules therein "apply to
taxable years with respect to which the applicable period for
assessing tax did .not expire before September 24, 2009 ." Secs .
301 .6229(c)(2)-1T(b), 301 .6501(e)-1T(b), Temporary Proced . &
Admin . Regs .,

supra . Perhaps the majority b .elieves that the

Secretary drafted the temporary regulations intending to limit
retroactivity to taxable years for which the .3-year period of
limitations had not expired on,September 2 .4, 2009, but he (unlike
the majority) 'realizes that that meaning is less than plain and
now has changed his mind and is taking advantage of his lack of
clarity to pull a fast one . There is of course no evidence to
support that . dubious theory . We believe that the Secretary meant
the temporary regulations to apply if either the 3-year or 6-year
period of limitations were open on . September 24, 2009,,but that
he was inartful in saying so . Such a reading is supported by IRS
Chief Counsel Notice CC-2010-010 (Nov . 23, 2009), which, in
relevant part, states :
The temporary regulations apply to taxable years with
respect to which the applicable period of limitations
for assessing tax did not expire before September 24,
2009 .
Accordingly, the temporary regulations apply to
any docketed Tax Court case in which the period of
limitations under sections 6229 ( c)(2) and
6501(e)(1)(A), as interpreted in the temporary
regulations , did not expire with respect to the tax
year at issue , before September P24, 2009 , and in which
no final decision has been entered . [ Emphasis added .]

= 35. If .that is what the Secretary meant, then what ground can
there be for the majority to conclude that the temporary
regulations do not apply to'this case because "the applicable
period for assessing tax" was`a 3-year period that expired before
September 24, 2009? . The possibilities appear to be that the
majority believes either that (1)" the Secretary has no authority
under any circumstance, to overrule the . Supreme Court's .
interpretation of a statute, (which implicates the Supreme Court's
decision in Natl . Cable & Telecomms Association v . Brand X
Internet Servs . , 545 U .S .,967 (2005)), (2) the Secretary . has no
authority retroactively to overrule the Supreme Court (also
implicating Brand X ), or (3) even if he does have those
authorities, under the so-called law of the case doctrine, we
need not acknowledge the temporary regulations in this case . I f
the majority believes any of those things, then it should explai n
itself . If not, then it should abandon its effective dat e
analysis (which the majority itself describes only as "a
plausible ground to rule against respondent's motions", majority
op . p . 16) and address petitioner's well-founded argument that
respondent cannot satisfy the high standards established by this
Court for granting either a motion to vacate or a motion t o
reconsider or simply ground its decision on its reason (which w e
question) for finding the temporary regulations invalid .

- 36, III .

The Deference Muddl e
In Bakersfield Energy Partners, LP v . Commissioner , 568 F .3d

767, 778 (9th Cir . 2009), affg . 128 T .C . 207 (2007), the Ninth
Circuit acknowledged that the Supreme Court in, Colony, Inc . v .
Commissioner ,, 357 U .S . 28 (1958_) ., had .
rejected the same interpretation the IRS is proposing
in this case . The IRS may have the authority to
promulgate a reasonable reinterpretation of an
ambiguous provision of the tax code, even if its
interpretation runs contrary to the Supreme Court's
"opinion as to the best reading" of the provision .
Nat'l Cable .& Telecomms . Ass'n v . Brand X'Internet
Servs . , 545 U .S . 967, 982-83, 125 S .Ct . 2688, 162
L .Ed .2d 820 (2005) ; . accord Swallows Holding, Ltd . v .
Comm'r , 515 F .3d 162, 170 (3d Cir . 2008) . We do not .
We think this is a signal that courts should be especially
careful about not deferring to new regulations that address this
old problem . Instead, the majority engages in a .fullblow n
analysis of the substantive validity of the regulations eve n
after concluding they do not apply because the regulations ar e
prospective only . The analysis has three parts :
• Sidestepping the longrunning issue of whether
.Treasury regulations are entitled to deference
under Chevron U .S .A ., Inc . v . Natural Res . Def .
Council , 467 U .S . 837 (1984) ; Nat . Muffler Dealers
Association, Inc . v . United States , 440 U .S . 472
(1979) ; or merely, Skidmore v . Swift & Co . , 323
U .S . 134 (1944) ;
An assertion that Chevron step one allows, and
perhaps requires, consideration of legislative
history in determining "whether Congress has
directly spoken to the precise question at issue",
Chevron , 467 U .S . at 842-843 ; and

- 37
An analysis of the additional question we have to
answer after Brand X , 545 U .S . at 984 : Did the
Supreme Court holdiin Colony .that-its
interpretation of the key phrase "omits from gross
income an amount properly includible therein" is
"the only permissible reading" of the statute ?
We agree with the majority that it is wise for us"as a trial
court to avoid the issue of what level of deference to give this
regulation . See

Swallows Holding, Ltd .(v . Commissioner , 126 T .C .

96, 180-181 (2006) (Holmes, J ., dissenting) (listing circuit
conflicts), vacated and remanded 515 F .3d 162 (3d Cir . 2008)
(holding regulations entitled to Chevron deference) .
We are particularly cautious about the majority's possible
reliance on Rodriguez de Quijas v . Shearson/Am . Express, Inc . ,
490 U .S . 477 (1989), see majority . op . note 14, as an additional
justification for invalidating the regulations . We agree of
course that "the Supreme Court has advised lower courts that `i f
a precedent of this Court *

* * has direct application in a case ,

yet appears to rest on reasons rejected in some other line of
decisions, the * * * [lower courts] should follow the case which
directly controls" . See . majority op . note 14 . But this rule,
which the Ninth Circuit alluded to in Bakersfield , is not what i s
at issue here . It is not our Court, but the Secretary, who is
reaching a different conclusion about the phrase "omits from .
gross income an amount properly includible therein" . The
validity of the regulation after Brand X cannot depend entirel y
on whether prior caselaw conflicts with a later regulation .

38 the Tenth Circuit recently reasoned : "When-a court tentatively
resolves an ambiguity in a statute that an agency is empowered to
administer, such a resolution carries the force of law until an
.agency issues a definitive interpretation of the kind that would
ordinarily warrant Chevron deference ."

Hernandez-Carrera v .

Carlson , 547 F .3d 1237, 1246 (10th Cit . 2008) (upholding
regulation contrary to Supreme Court decision after applying
Brand X ) . We simply can't reasonably assert, a quarter-century
after Chevron and, now, after Brand X , that "courts have
traditionally determined the meaning of statutes," majority op .
note 12, if by that we mean that an agency with regulatory power
cannot definitively resolve ambiguous statutory language . 4
We think that the problems of how to use legislative history
in a Chevron analysis and the effect of

Brand X on reinterpreting

old Supreme Court tax cases are both much more complicated than
the majority lets on .
A.
The Chevron test seems quite simple . Step one : Determin e
"whether Congress has directly spoken to the precise question at
issue ."

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

4 Hernandez-Carrera v . Carlson , 547 F .3d 1237, 12.46 (10th
Cit . 2008), seems to be the first case to test Brand X 's effect
on Supreme . Court .precedent . But we ought not to simply state
that we take no position on the question in one footnote,
majority op . note 15, while seeming to assert . the contrary view
in another, majority op . note 14 .

- 39
at 842 . If so, stop . Step two : If Congress has not directly
spoken to the question or if what it has said is ambiguous, then
determine if the agency's interpretation is "based on a
permissible construction of the statute ."

Id .

at 843 .

But Chevron 's simplicity ends there . 5
We focus first on the use of legislative history in
step one :

Chevron

Chevron tells lower courts to use the "traditional

tools of statutory construction" to determine if Congress has
spoken on the precise issue .
Id .

Chevron v . Commissioner , 467 U .S .

at 843 n .9 . But how does Congress "speak"? Is it only in

the enacted language and its context within a statute, or does it
include committee reports, floor speeches, staff-prepared
material, and postenactment commentary in later Congresses? And
if courts are directed to employ legislative history, when can
they do so--only if the text is ambiguous ; only,if .it shows
congressional intent clearly contrary to the plain meaning of th e

5Commentators have not been kind to judges . See, e .g .,
Sunstein, " Chevron Step Zero", 92 Va . L . Rev . 187, 221 (2006)
(caselaw in ."chaos") ; Eskridge & Baer, "The Continuum of
Deference : Supreme Court Treatment of Agency Statutory
Interpretations from Chevron to Hamdan ", 96 Geo . L .J . 1083, 1157
(2008) (caselaw "a mess") ; Hickman, "A Problem of Remedy :
Responding to Treasury's (Lack of) Compliance with Administrative
Procedure Act Rulemaking Requirements", 76 Geo . Wash . L . Rev .
1153, 1200 (2008) (Hickman, "A Problem of Remedy") ("a mess") ;
Beermann, "End the Failed Chevron Experiment Now : How Chevron Has
Failed and Why It Can and Should Be Overruled", 42 Conn . L . Rev .
.779, 808 (2010) ("confusing") ; Murphy, "Judicial Deference, .
Agency Commitment, and Force of Law", 66 Ohio St . L .J . 1013, 1022
(2005) (a "confusing mess") .

40 text ; or whenever it would be helpful in figuring out the
meaning, or maybe the purpose, of the act ?
These are far-from-settled issues . As other courts have
noted, the Supreme Court itself has sent what seem to be mixed
signals :
• No consideration at step one-- Coeur Alaska, Inc . v . Se .
Alaska Conservation Council , 557 U .S . , 129 S .
Ct . 2458, 2469 (2009) .(implying the statutory text is
how Congress speaks directly on an issue) ; Natl . R .R .
Passenger Corp . v . Boston & Me . Corp . , 503 U .S . 407,
417 (1992) (comparing the agency's construction only to
the statutory text at step one) ; K Mart Corp . v .
Cartier, Inc . , 486 U .S . 281, 291 (1988) ("If the agency
regulation is not in conflict with the plain language
of the statute, a reviewing court must give deference
to the agency's interpretation of the statute ." (citing
United States v . Boyle , 469 U .S . 241, 246 n .4 (1985))) ;
Consideration only if the .text is unclear-- Zuni Pub .
Sch . Dist . No . 89 v . Dept . of Educ . , 550 U .S . 81, 93
(2007) ("if the intent of Congress is clear an d
unambiguously expressed by the statutory language at
issue, that would be the end of our analysis .") ; Dept .
of HUD v . Rucker , .535 U .S . 125, 132 (2002) ("reference
to legislative history is inappropriate when the text
of the statute is unambiguous") ; Sutton v . United Air
Lines, Inc . , 527 U .S . 471, 482 (1999) (declining to
consider legislative history when text was clear) ;
Legislative history used at step one as a traditional
tool-- FDA v . Brown &-Williamson Tobacco Corp . , 529 U .S .
120, 130-155 (2000) ; Pauley v . BethEnergy Mines, Inc . ,
501 U .S . 680, 697-699 (1991) ; Pension Benefit Guar .
Corp . v . LTV Corp . , 496 U .S . 633, 649-650 (1990) .

41 There are even a fair number of cases that make it difficult to
discern whether the Court is consulting legislative history at
step. one or step two . 6
The majority does acknowledge this difficulty, but discerns
a recent trend toward using legislative history in some way in
step one, majority op . note 18 . We think the matter is less
clear . Here's the current circuit court breakdown :
• First Circuit-- Perez-Olivo v . Chavez , 394 F . 3d 45, 50
n .2 (1st Cir . 2005) (okay in step one "merely * * * to
confirm that it does not resolve the [statutory]
ambiguity") ; Succar v . Ashcroft , 394 F .3d 8, 22-23 (1st
Cir . 2005) (okay in step one) ;
• Second Circuit-- Cohen v . JP Morgan Chase & Co . , 498
F .3d 111, 122-124 (2d Cir . 2007) (noting reluctance to
rely on legislative history in step one, but then doing
it) ; .
• Third Circuit-- United States v . Geiser , 527 F .3d 288,
293 .(3d Cir . 2008) (excludes legislative history in
step one) ;

'As numerous commentators have concluded, the application of
Chevron has developed not necessarily in a consistent direction .
See, e .g ., United States v . Riverside Bayview Homes, Inc . , 474
U .S . 121, 131 (1985) ("our review is limited to the question
whether it is reasonable, in light of the language, policies, and
legislative history of the Act") . ; Chem . Manufacturers Association
v . Natural Res . Def . Council, Inc . , 470 U .S . 116, 126 (1985) ("we
conclude that the statutory language does not foreclose the
agency's view of the statute . We should defer to that view
unless the legislative history or the purpose and structure of
the statute clearly reveal a contrary intent on the part of
Congress .") . See generally Coke v . Long Island Care at Home,
Ltd . , 376 F .3d 118, 127-129 (2d Cir . 2004) (describing the
problem and considering legislative history in both steps, but"without attaching primacy" in step one), vacated 546 U .S . 1147
(2006) .

- 42 Fourth Circuit--Compare Dominion Res ., Inc . v . United
States , 219 F .3d 359, 365 (4th Cir . 2000) (okay in step
one), and Brown & Williamson Tobacco Corp . v . FDA , 153
F .3d 155, 162 (4th Cir . 1998) (same), affd . 529 U .S .
120 (2000), with Granutec, Inc . v . Shalala , 46
U .S .P .Q .2d 1398, 1404 (4th Cir . 1998) (unpublished
decision) (only in step two) . ;
Fifth Circuit-- Sierra Club v . U .S . FWS , 245 F . 3d 434,
443 n .51 (5th Cir . 2001) ( okay in step one (citing INS
v . Cardoza - Fonseca , 480 U . S .- 421, 449 (1987))) ;
Sixth Circuit--Compare Johnson City Med . Ctr . v . United
States , 999 F .2d 973, 976 (6th Cir . 1993) (okay in step
one even if statute is clear), with Alliance for Cmty .
Media .v . FCC , 529 F .3d 763 ., 778 (6th Cir . 2008) .
(consider in step two) ;
Seventh Circuit--Compare Univ . of Chi . Hosps . v . United
States , 545 F .3d 564, 569 (7th Cir . 2008) (refusing to
consider legislative history after finding statut e
unambiguous), with Khan v . United States , 548 F .3d 549,
556 (7th Cir . 2008) ("we proceed to Chevron 's second
step . * * * In this step, we can take into account
extrinsic sources such as legislative history .") ;
• Eighth Circuit--Compare Ark . AFL-CIO v . FCC , 11 . F .3d
1430, 1440 (8th Cir . 1993) (allows legislative history
in step one, but only if intent is not clear from the
statute's plain language), with Mayo Found . for Med .
Educ . & Research v . United States , 568 F .3d 675, 681682 (8th Cir . 2009) (considering legislative history in
step two) ;
• Ninth Circuit--Compare Natural Res . Def . Council, Inc .
v . U .S . EPA , 526 F .3d 591, 603 (9th Cir . .2008)
(considering legislative history in step one), with
Schneider v . Chertoff , 450 F .3d 944, 955 n .15 (.9th Cir .
2006) (courts cannot consider legislative history in
step one) ;
• Tenth Circuit-- Anderson v . U .S . DOL , 422 F .3d 1155,
1180 (10th Cir . 2005) (okay in step one) ; Cliffs
Synfuel Corp . v . Norton , 291 F .3d 1250, 1257 (10th Cir .
2002) '(same ) ; Utah v . Babbitt , 53 F .3d 1145, 1148 (10th
Cir . 1995) ( same) ;

- 43 • Eleventh Circuit-- Guar . Fin . Servs ., Inc . v . Ryan , 928
F .2d 994, 1003-1004 (11th Cir . 1991) (use in step one
after finding statute ambiguous) ;
D .C . Circuit-- Sierra Club v . EPA , 551 F .3d 1019, 1027
' (D .C . Cir . 2008) (legislative history okay in step one
even to create ambiguity) ; Am . Bankers Association v .
Natl . Credit Union Admin . , 271 F .3d 262, 267 (D .C . Cir .
2001) (same) ; Natural Res . Def . Council, Inc . v .
Browner , 57 F .3d 1122, 1126-1127 (D .C . Cir . 1995)
(same) ; an d
• Federal Circuit-- Amber-Messick v . United States , 483
F .3d 1316, 1323-1324 (Fed . Cir . 2007) (used in both
steps) ; Star-Glo Assoociates, LP v . United States , 414
F .3d 1349, 1356 (Fed . Cir . 2005) (used in step,one) .
B .
The . fundamental problem in this area--and it's not one that
we as a trial court can possibly solve on our own--is that
legislative history is a "traditional tool of statutory
interpretation" most commonly used when the language of a statute
is ambiguous on some point . But if the language of a statute is
ambiguous,

Chevron tells us to read that ambiguity as a

delegation of authority to fill the resulting gap with a
regulation . Looked at this way,

Colony 's resort to legislative

history in the first place shows a gap that the Secretary is ipso
facto allowed to fill . If so, then the Supreme Court's sentence
"it cannot be said that the language is unambiguous",

Colony,

Inc . v . Commissioner , 357 U .S . at 33, triggered not only that
Court's own look at legislative history, but the authority of the
Secretary to issue the regulation we have before us .

44 One way to read the many decisions using legislative history
in step one of Chevron is as another check on agency
discretion--another way of finding a lack of ambiguity in
congressional intent . But the confusion in this area becomes a
muddle when one adds in the analysis of whether a pre- Brand X
precedent that uses legislative history is an analysis that,
under Brand X , precludes the choice made by the agency in a
regulation . Pay particular attention to the passage from Brand X
that the majority quotes, majority op . p . 19 : "A court's prior
judicial construction of a statute trumps an agency construction
otherwise entitled to

Chevron deference only if the prior cour t

decision holds that its construction follows from

the unambiguou s

terms of the statute and thus leaves no room for agency
discretion ."

Brand X , 545 U .S . at 982 (emphasis added) .

It is at least possible that the emphasized language is a
direction to lower courts to distinguish pre- Brand X precedents,
that resorted to legislative history from those that relied on
plain-language analysis as a way of distinguishing between
precedents that allow for their own regulatory supersession from
those that do not . It would suggest in this case the Supreme
Court's use of legislative history in Colony would not trump an
agency construction .
Consider AARP v . EEOC , 390 F . Supp . 2d 437 (E .D . Penn .
2005), affd . on other grounds 489 F .3d 558 (3d Cir . 2007) . In an

- 45 earlier case, the Third Circuit held-that the Age Discrimination
in Employment Act banned treating retirees who were eligible for
Medicare differently from those who were not in providing health
benefits . See Erie County Retirees Association v . County o f
Erie , 220_F .3d 193 (3d Cir . 2000) . The Court carefully reviewed
the legislative history to reach its conclusion . See id .
208 .

at 205-

.
Then out popped a contrary, regulation from the EEOC . The

District Court judge faced with the regulation vs . precedent
question reasoned tha t
Brand X 'clarified the Chevron standard itself . In
applying Chevron 's first step to the regulation at
issue in . Brand X , the Supreme Court did not . ask merel y
whether Congress had "spoken to the precise question at
issue," Chevron , .467 U .S . at 843, * * * but rather
"whether' the statute's plain terms "directly address
the precise question at issue ."' Brand X ,'125 S .Ct . at
2702 * * *
AARP v .

EEOC ,

supra at 445 .

The District Court then analyzed the pre -regulation
precedent on point ,

and concluded that " Like its arguments fro m

legislative history, the * * * [Third Circuit'

appeals t o

general congressional intent and the balancing of competing
policy considerations would seem unnecessary if its decision-were
the only permissible construction of the statute ."
n .10 ; see also, e .g .,

Id .

at 450

Mayo Found . for Med . Educ . & Research v .

United States , 503 F . Supp . 2d 1164, 1174 (D . Minn . 2007)

46 (drawing similar distinction in light . of Brand X ), revd . 568 F .3d
675 (8th Cir . 2009) .
AARP -is certainly not the, last possible word on this
subject . There may well be a distinction between using
legislative history to supply the

meaning of a particular word or

phrase and using legislative history to discern the purpose or
goal of the statute in which Congress placed that word or phrase
so as to be able to best construe it in . a particular case . Judge
Easterbrook, in, his landmark taxonomy on uses of legislative
history,

In re Sinclair , 870 F .2d 1340, 1342 (7th Cir . 1989),

suggested that legislative history may be . used as a dictionary of
sorts--to determine Congress's objective rather than subjective
intent .

Id .

at 1343 ("`we ask, not what this man meant, but wha t

those words would mean in the mouth of a normal speaker of
English, using them in the circumstances in which they were
used .'" . (quoting Holmes, "The Theory of Legal Interpretation", 1 2
Harv . L . Rev . 417, 417-419 (1899))) . Seen in this light,
legislative history-should be used to discover the statute's
"original meaning", rather than the intent of the individual
congressman .

Id .

at 1343 ("An opinion poll revealing the wishes

of Congress would not translate to legal rules") .
Used in this way, legislative history in step one may
present fewer problems . Rereading Colony, Inc . v . Commissioner ,
357 U .S . 28 (1958), with this distinction in mind might lead one

47 to conclude that the Court was using legislative history to
discern the best reading of ambiguous statutory language in ligh t
of the specific problems its drafters had in mind . See id .
33-35 . If so, the holding of

Colony is not that "omission "

necessarily means "omission of a particular item", but only that
that's the best reading until and unless a regulation clarifying
the admitted ambiguity of "omits from gross income an amoun t
properly includible therein" is validly issued .
Few courts have explicitly considered and,employed this
possible distinction, and we would not necessarily advocate its
use here . The conclusion we would draw is simply that the rules
for reexamining precedents after Brand X are quite uncertain . We
don't believe it is beyond the capability of the Tax Court to
address such issues with the necessary subtlety, but the majority
doesn't even try .
We won't try either, since we prefer to climb onto firmer
ground .
IV .

Procedural Validity of the .Temporary Regulation s
That firmer ground, and the reason we are able to concur in

our colleagues' . result, is that these regulations are
procedurally invalid under the Administrative Procedure Act
(APA), 5 U .S .C .A . secs . 551-559, 701-706 (West 2007 & Supp .
2009), as amended by the Patient Protection & Affordable Care

- 48 Act, Pub . L .

.111-148, sec . 6402, 124 Stat . 756 (2010), which

governs rulemaking even by the Secretary .
The APA requires agencies to publish . contemplated rules to
.allow the public to make comments on their content and effect . 5
U .S .C . sec . 553(b) and (c) (2006) . To ensure measured, informed
rulemaking, the agency is then required to take those comments
into consideration before promulgating a final rule .

Id .

sec .

553(c) . The publication of the .rule must occur "not less than 30
days before its effective date", .

Id .

sec . 553(d) . The agency

must also provide "reference to the legal authority under which
the rule is,proposed" .

Id .

sec . 553(b)(2) . And these minimum

requirements may be modified or superseded only if Congress does
so expressly .

Id .

sec . 559 .

In the case of these regulations, the Secretary stated his
legal authority for the rules--the section 6501(e) regulation was
issued under section 7805 and the section 6229 regulation was
issued under sections 7805 and 6230(k) . The Secretary didn't
publish the regulations 30 days before their effective date, but
respondent argues--and . the majority essentially concedes--that
the Secretary's power to . make retroactive rules under section
7805(b) (pre-1996) applies . But the Secretary .did not seek

49 comments before publishing these temporary regulations, nor did
he claim good cause for skipping this step . '
Respondent first argues that the APA itself excuses his
failure to put the regulations through notice and comment . The
Administrative Procedure Act, 5 U .S .C . section 553(b), provides :
this subsection does . not apply-(A) to interpretative rules, general statements of
policy, or rules of agency organization, procedure, or
practic e
The APA provides similar exemptions from the prepublication
requirement .

Id .

sec . 553(d) .

Respondent does not rely on any argument that these
regulations are mere statements of policy or rules of Treasury's
organization, procedure, or practice . For the regulations to be
valid, then, we must find they are interpretive rules, or we have
to accept respondent's alternative argument that Congress waived
the APA's notice-and-comment requirement for temporary ta x
regulations .

'When Treasury regulation drafters find good cause to skip
notice and comment, Internal Revenue Manual pt . 32 .1 .5 .4 .7 .5 .1(4)
(Aug . 11, 2004) directs them to include the following text in the
regulations : "`These, regulations are necessary to provide
taxpayers with immediate guidance . Accordingly, good cause is
found for dispensing with notice and public comment pursuant to 5
U .S .C . 553(b) and (c) . This thin a justification might or might
not work, but it is absent from these regulations or the related
Treasury Decision . See. T .D . 9466, 74 Fed . Reg . 49321 (Sept . 28,
2009) . Respondent concedes in his reply brief that he is not
relying on this exception .

50 A.

The Interpretive Exceptio n

The Treasury Decision containing the regulations, without
claiming a particular exception,8 states .: "It also has been
determined that section 553(b) of the * * * [APA] does not apply
to these regulations ." T .D . 9466, 74 Fed . Reg . 49321, 49322
(Sept . 28, 2009) . Respondent argues this is because these
regulations are interpretive rules (as opposed to legislative or
substantive rules), merely clarifying the phrase "omitted from
gross income" without changing existing law . Respondent also
argues that these regulations are interpretive because they were
issued pursuant to the general grant of authority in section

7805

rather than under a specific grant of authority directing the
Secretary to issue a regulation with specified content .
The Tax Court often labels as "interpretive" those
regulations that the Secretary issues under the general authorit y
of section 7805(a), in contrast to "legislative" regulations, b y
which we and other tax specialists mean those regulations issued
under a more specific authority from Congress . 9

8The Treasury Decision does say that the regulations contain
a "reasonable interpretation" of the statutory provisions . T .D .
9466, 74 Fed . Reg . 49321, 49322 (Sept . 28, 2009) . Perhaps this
was the Secretary's attempt to claim the interpretive exception,
but it makes little difference as the APA doesn't require an
explicit assertion of the interpretive-rule exception .
9Even by this bright-line rule, however, the applicable
regulation isn't clearly interpretive in the tax-law sense .
Though the parties refer to the two regulations in tandem,
(continued . . .)

51 But "interpretive" means something different in
administrative law .-Berg, "Judicial Deference to Tax
Regulations : A Reconsideration in Light of National Cable ,
Swallows Holding , and Other Developments", 61 Tax Law . 481, 486487 (2008) ("the Administrative Procedure Act (APA) draws the
line between legislative and other regulations differently [than
tax law] ." (fn . ref . omitted)) . In administrative law,
"interpretive" .is a label reserved for regulations that "advis e
the public of the agency's construction of the statutes and rules .
which it administers ." Clark, U .S . Dept . of Justice,,'Attorney
General's Manual on the Administrative Procedure Act 39 (1947),
available at http ://www .law .fsu .edu/library/admin/1947cover .html
(providing working definitions) .10 Substantive or legislativ e

9( . . .continued)
section 6229 governs partnerships, meaning that the regulation
applicable here is section 301 .6229(c)(2)-1T, Temporary Proced .
Admin . Regs . See majority op . note 2 . This regulation . was
issued under two sources of authority--section 7805 and 6230(k) .
The tax-law definition of interpretive has largely been limited
to regulations issued solely under section 7805 . See Asimow,
"Public Participation in the Adoption of Temporary Tax
Regulations", 44 Tax Law . 343, 358 (1991) ; see also Berg,
"Judicial Deference to Tax Regulations : A Reconsideration in
Light of National Cable , Swallows Holding , and Other
Developments", 61 Tax Law . 481, 485-486 (2008) .
10Though the Attorney General's Manual is not a source of
binding law, its definitions are useful as near-contemporaneous
constructions of the APA . See Bowen v . Georgetown Univ . Hosp . ,
488 U .S . 204, 218 (1988) (Scalia, J ., concurring) (referring to
the Attorney General's Manual as "the Government's own mos t
authoritative interpretation of the APA * * * which we have
repeatedly given great weight", citing examples) .

- 52
rules,

.on the other hand, are "rules, other than organizational

or procedural * * * issued by an agency pursuant to statutory
authority and which implement the statute * * * . Such rules have
the force and effect of law ."

Id . ; see also Batterton v .

Francis , 432 U .S . 416, 425 n .9 (1977) (and cases cited) . In
other words, legislative rules are.-those that are binding .
Chrysler Corp . v . Brown , 441 U .S . 281, 301-302 & n .31 (1979) ;
Hickman, "Coloring Outside the Lines : Examining Treasury's (Lack
of) Compliance With Administrative Procedure Act Rulemaking
Requirements", 82 Notre Dame L . Rev . 1727, 1762-1763 (2007)
(Hickman , "Coloring Outside the Lines") ; Merrill & Watts, "Agency
Rules With the Force of Law : The Original Convention", 116 Harv .
L . Rev . 467, 476-477 (2002) .
Courts have applied various tests to distinguish between
legislative and interpretive rules, but the D .C . Circuit's test
in Am . Mining Cong . v . Mine .Safety & Health Admin . , 995 F .2d 110 6
D .C .

Cir . 1993), has become the "dominant standard" . Hickman,

"Coloring Outside the Lines",

supra at 1766 ; see also 1 Pierce ,

Administrative Law Treatise, sec . 6 .4, at 454 (5th ed . 2010)
(citing adoption of the test in six circuits including the Tenth
and D .C . Circuits) ."

Am . Mining Cond . v Mine Safety & Healt h

"See Warder v . Shalala , 149 F .3d 73 (1st Cir . 1998) ;
Mission Group Kan ., Inc . v . Riley , 146 F .3d 775 (10th Cir . 1998) ;
Truckers United for Safety v . Fed . Highway Admin ., 139 F .3d 934
(D .C . Cir . 1998) ; Aulenback, Inc . v . Fed . Highway Admin . , 10 3
(continued . . .)

- 53 Admin . ,

supra at 1109, relying-on-both caselaw and the Attorney

General's Manual, held that a rule is legislative if Congress has
given the agency authority to issue rules with the force of law
and the agency intended to use that authority The court listed
four ways an agency could show it intended to issue legislative
rules :
(1) whether in the absence of the rule there would not
be an adequate legislative basis . for enforcement action
or other agency action to confer benefits or ensure the
performance of duties, (2) whether the agency ha s
published the rule in the Code of Federal Regulations,
(3) whether the agency has explicitly invoked its
general legislative authority, or (4) whether the rule
effectively amends a prior legislative . rule . If the
answer to any of these questions is affirmative, we
have a legislative, . not an interpretive rule .
Id . _at 1112 . These fours ways of finding agency intent hav e
developed over time . A subsequent case in the D .C . Circui t
rejected the second way, calling publication in the CFR merely a
"snippet of evidence of agency intent", and rejecting a claim
that rules were legislative based on publication alone .12

Healt h

11 ( . . . continued )
F .3d 156 (D .C .Cir . 1997) ; Appalachian States Low-Level
. Radioactive Waste Commn . v . O'Leary , 93 F .3d 103 (3d Cir . 1996) ;
Hoctor v . USDA , 82 F .3d 165 (7th Cir . 1996) ; Chen Zhou Chai'v .
Carroll , 48 F .3d 1331 (4th Cir . 1995) ; N .Y . City Employees' Ret .
Sys . v . SEC, 4 .5 F .3d 7 (2d Cir . 1995) .
'2One scholar noted that it was common for some agencies to
publish any rule with "legal effect" in the CFR (and recognized
this phrase was broader than the "force of law"), and that the
court didn't want to discourage this practice because it is
.
beneficial to the public . 1 Pierce, Administrative Law Treatise,
sec . 6 .4, at 453 (5th ed . 2010) .

54 Ins . Association of Am ., Inc . v . Shalala , 23 F .3d 412, 423 (D .C .
Cir . 1994) . The Ninth Circuit added a look into whether a rule
binds "tribunals outside the agency ."

Erringer v . Thompson , 371

F .3d 625, 631 (9th Cir . 2.004) (citing Hemp Indus . Association v .
Drug Enforcement Admin . , 333 F .3d 1082,

1088

(9th Cir . 2003)) .

Other cases have relied upon a criterion discussed but not
applied in Am . Mining Cong . v . Mine Safety & Healthy Admin . ,
supra --that if an agency issues a rule interpreting a legislative
rule, the underlying legislative rule cannot be too vague or
open-ended to support the interpretation . See, e .g .,

Gonzales v .

Oregon , 546 U .S . 243 (2006) .
Though American Mining 's test is not universally accepted,
the case reconciles the precedents well and is accepted by at
least two of the three potential appellate courts here . See,
e .g .,

U .S . Telecomm . Association v . FCC , 400 F .3d 29, 34-35 (D .C .

Cir . 2005) ;

Mission Group Kan ., Inc . v . Riley , 146 F .3d 775, 784

(10th Cir . 1998) .1 3

"The Eighth Circuit addressed the characterization of
interpretive versus legislative rules in Drake v . Honeywell,
In a brief discussion, it
Inc . , 797 F . 2d 603 ( 8th Cir . 1986 ) .
appeared to adopt a similar approach of looking to the agency's
intent and whether the agency had a delegation of law - making
authority .
Id . at 607 - 608 . Similarly , in Nw . Natl . .Bank v . U .S .
Dept . of the Treasury , 917 F .2d 1111, 1116-1117 ( 8th Cir . 1990),
the Eighth Circuit relied on the familiar distinction that an
interpretive rule merely reminds parties of existing duties while
a legislative rule " ` has the force of law , and creates new law or
imposes new rights or duties ."'
But in Howard E . Clendenen , Inc . v . Co mm issioner , 207 F .3d
(continued . . .)

- 55 1 .

Does the Secretary Have Authority To Issue
Rules With the Force of Law ?

American Mining asks first whether a particular agency ha s
the authority to issue rules having the force of law . The
Secretary does--Congress delegated authority to him in various
Code sections to create rules and regulations . Section 7805(a)
contains the broadest of these delegations, allowing promulgation
of "all needful rules and regulations for the enforcement of this
title" . ("[T]his title" in section 7805(a) refers the entire
Internal Revenue Code .) Such regulations carry the force of law,
because the Code imposes penalties for failing to follow them .
Sec . 6662(b) ; see also Merrill & Watts,

supra at 477 .

And it is also obvious that the regulations in this case, if
valid, would bind both respondent and petitioner . We have held
that both temporary and final regulations have the force of law,
and we give both the same weight . See Schaefer v . Commissioner ,
105 T .C . 227, 229 (1995) . . Both temporary and final regulations
give rise to penalties . Sec . 6662(b) ; sec . 1 .6662-3(b)(2) ,
Income Tax Regs . ; Hickman, "Coloring Outside the Lines",

supra at

13 ( . . . continued )
1071, 1074 (8th Cir . 2000), affg . T .C . Memo . 1998-318, the Eighth
Circuit may have held that regulations that the Secretary issued
without specific authority do not have the force of law, though
it did refer to them as law, see id . ("Congress considered thenexisting law--namely, Section 402(e)(3), together with it s
regulations"), and appeared to give them legal effect, id . at
1075 (citing the regulations for its conclusions without further
sources) .

56 1738-1739 . And both general- and,specific-authority regulations
also give rise to penalties, so the Secretary's issuance of these
regulations under section 7805 makes no difference . Hickman,
"Coloring Outside the Lines",

supra at 1762-1763 ("Regulations

that bind both the government and regulated parties are
legislative, whether promulgated pursuant to specific or general
statutory authority ." (citing Shalala v . Guernsey Meml . Hosp . ,
514 U .S . 87, 99 (1995), and several other sources)) .
We would therefore conclude that both section 7805(a) and
the various more specific . Code sections delegate legislative
authority to the Secretary .
2 .

Did the Secretary Intend To Issue Regulations With
the Force of Law ?

The second part of the American Mining test asks whether the
agency intended the regulations to have the force of law . If we
go through American Mining 's list of the,specific ways an agency
can show it intends a rule to have the force of law, we find that
two are present here . The first is the Secretary's invocation of
his general authority to issue . regulations, plainly noted in the
Treasury Decision containing the regulations themselves .
Respondent claims that the regulations are interpretive under the
APA, but the Secretary's cited source of authority doesn't quite
match that sentiment--he promulgated one of these regulation s
explicitly under section 7805 alone and the other under both

- 57 section 7805 and section 6230(k), knowing that regulations issued
under these sections carry the force of law .
The second-is that these regulations effectively changed (or
at least tried to change) existing law .

American Mining phrased

this factor as amending "a prior .. legislative rule ." This leads
to another question left unanswered and unaddressed by th e
majority : Does Brand X require an agency's- .interpretation to be
embodied in a legislative rather thah .an interpretive rule to
trump an existing judicial interpretation? Even assuming . an
agency interpretation can displace the Supreme Court's, see
Hernandez-Carrera v . Carlson , 547 F .3d 1237 (10th Cir . 2008) ., we .
think the answer must be yes, in'part because when there is
otherwise binding judicial precedent, an agency interpretation
asserting a contrary interpretation amounts to a change in the
law ." Certainly, as the Ninth Circuit recognized in
Bakersfield , 568 F .3.d at 768, 778, a Supreme Court decision such
as

Colony binds lower courts at least until . something. changes .

Respondent wants us to vacate our otherwise final decision, whic h

14The Brand X framework also suggests this result . In Brand
X, the Court weighed a prior judicial'interpretation against "an
agency construction otherwise entitled to Chevron deference" .
Natl . Cable & Telecomms . Association v . Brand X Internet Servs . ,
545 U .S . 967, 982 (2005) . Just 5 years earlier, the Court said
interpretive rules--those lacking the force of law--aren' t
entitled to Chevron deference .
Christensen v . Harris County , 529
U .S . 576, 58.7 (2000) . It seems to follow that if an agency wants
to trump judicial precedent, it has to issue legislative rules .

58 he could not logically . ask us to do without implying that the
Secretary intended that these new rules have the force of law .
But we don't need to puzzle this out .

American Mining tell s

us : "If the answer to any of these questions is affirmative, we
have a legislative, not an interpretive rule ."

Am . Mining , 995

F .2d at 11.12 . So even if our reasoning on this second way of
finding agency intentis wrong, . it remains true that the
Secretary explicitly invoked his legislative authority in
promulgating these regulations and Congress entrusted him with
that power . That-makes them legislative .
Thus, although the regulations may be "interpretive"
according to the common usage in the sense that they set forth
respondent's interpretation of . the underlying statutes, and
"interpretive" according to tax-law usage in the sense that one
of them was issued under section 7 .805 alone, they are not
"interpretive" under the APA's exception to the
notice-and-comment requirements because they are meant to bind
the public, which the Secretary has the power to do .' 5

"Nearly 30 years ago, in Wing v . Commissioner , 81 T .C . 17,
28 (1983), we mentioned that . Treasury regulations, though deemed
to have the force of law, still qualify as `interpretative' rules
and are exempt from the APA's requirements . In context, this was
dictum, and the overwhelming weight of precedent from later years
counsels us not to follow it .

- 59 B.

Section 7805(e) and the APA

Though the Secretary did not subject the regulations to
notice and comment, he did issue identical proposed regulations
and a Notice of Proposed Rulemaking (NPRM) at the same time as
the temporary regulations, as required by section 7805(e)(1) .
This section-directs the Secretary, when issuing temporary
regulations, to issue .a simultaneous NPRM and sets a 3-year
expiration date for all temporary regulations . The legislative
history of that section, respondent says, shows that Congress was
aware of the Secretary's procedures of issuing temporary
regulations that were effective-immediately but without notice
and comment .16 He says that Congress implicitly okayed that
process by limiting the temporary regulations to 3 years and
ensuring that the Secretary issued an NPRM at the same time .
Even though this violates the APA, he justifies it by arguing
that section 7805(e) conflicts with the APA, and in the battle o f

"Prior law had allowed temporary regulations to linger for
a very long time, to the point that courts were beginning to
notice .a pattern of the Secretary's growing reliance on temporary
regulations without ever finalizing or repealing them . See,
e .g ., Fleming .v . Commissioner , T .C . Memo . 2010-60 (relying on
25-year-old temporary regulations for substantiation standards) .
Several commentators suggest that Congress was actually aiming to
restrict the Treasury's regulation writers by curtailing this
practice . See Hickman, "A Problem of Remedy," supra at 1209 ;
ABA, Section of Taxation, "Report of the Task Force on Judicial
Deference", 57 Tax Law . 717, 735 (2004) ; Asimow, supra at 363364 .

60 the statutes, a specific statute trumps a general one . See
Bulova Watch Co . v . United States , 365 U .S . 753, 758 (1961) .
We do not agree . First we note that nothing in the text of
the statute suggests that the notice-and-comment requirement has
been waived, nor does the legislative history state that it has .
The legislative history does note that the Secretary commonly
issued temporary regulations with immediate effect, but this
alone hardly suggests Congress meant to waive notice and comment
for all temporary regulations ." The legislative history does
not even mention the APA, and, both, the Supreme Court and the APAitself provide that exceptions to the APA's terms cannot b e
inferred--much less inferred from an absence in the legislativ e
history :
Recognizing the importance of maintaining .a
uniform approach to judicial review of administrative
action * * * we have closely examined the * * * claim
for an exception to that uniformity . * * * [Congress
has specified] in the APA that "no subsequent
legislation shall be held to supersede or modify the
provisions of this Act except to the extent that such
legislation shall do so expressly ." 5 USC § 559 . * * *
The APA was meant to bring uniformity to a field full
of variation and diversity . * * *

"Though issuing a simultaneous NPRM and seeking posteffective comments is consistent with respondent's argument,
Congress may have intended this to apply only to temporary
regulations that already fit into an exception to the APA,
especially considering that a need for temporary regulations
would normally be expected in emergency or good-cause situations .

61 Dickinson v . Zurko , 527 U .S . 150, 154-155 (1999) . Respondent may
think that section 7805(e) makes him special when it comes to
rulemaking, but the APA .makes it clear that he is not .
Giving the public the opportunity to participate through
notice and comment is important in giving regulations legitimacy .
See United States v . Mead Corp . , 533 U .S . 218, 230 (2001) ;
Christensen v . Harris County , 529 U .S . 576, 587 (2000) ;

Chrysler

Corp . v . Brown , 441 U .S . at 316 ; see also Hickman, "A Problem of
Remedy : Responding to Treasury's (Lack of) Compliance with
Administrative Procedure Act Rulemaking Requirements", 76 Geo .
Wash . L . . Rev . 1153, 1201 .(2008) (Hickman, "A Problem of Remedy" )
("The .APA and its notice-and-comment rulemaking procedures
reflect congressional goals of simultaneously facilitatin g
government rulemaking and .protecting individual rights through
public participation .") ;

id .

at 1204 ("While perhaps less than

ideal, the APA notice-and-comment process, coupled with judicial
review of the agency's adherence to that process, serves as a
second-best proxy for the legislative process when Treasury or
any other . agency seeks to bind the public'with regulations having
the force and effect of the statutes . they purport to
interpret .") .
Giving the public achance to comment only after making the
regulations effective does not comply with the APA . See, e .g .,
Chrysler Corp v . Brown ,

supra at 315 ;

Paulsen v . Daniels , 413

62 F .3d 999, 1005 (9th Cir . 2005) ("It is antithetical to the
structure and purpose of the APA for an, agency to implement a
rule first, and then seek comment later .") . And courts
invalidate even final regulations when an agency does this .18
See, e .g .,

U .S . Steel Corp . v . U .S . EPA , 595 F .2d 207, 214-215

(5th Cir . 1979) . But see

Fed . Express Corp . v . Mineta , 373 F .3d

112 (D .C . Cir . 2004) .
Because these regulations were issued under sections 6230(k)
and/or 7805, they are binding and legislative as a matter of
administrative law . We would therefore invalidate them on
procedural grounds for failure to comply with the APA .
A court should not entirely ignore invalidated regulations-but we cannot give them binding force .19 See Chrysler Corp . v .
Brown ,

supra at 313 ("regulations subject to the APA cannot be

afforded the `force and effect of law' if not promulgate d
pursuant to the statutory procedural minimum found in that Act") ;

18Respondent does point to some cases where temporary
regulations were relied upon despite not undergoing notice and
comment, see UnionBanCal Corp . v . Commissioner , 305 F .3d 976 (9th
Cir . 2002), affg . 113 T .C . 309 (1999) ; Kikalos v . Commissioner ,
190 F .3d 791 (7th .Cir . 1999), revg . T .C . Memo . 1998-92, but in
these cases APA compliance wasn't challenged . We also note, as
we did in UnionBanCal Corp . v . Commissioner , 113 T .C . at 317 n .8,
that the Secretary asserted a good-cause exception to the APA's
notice-and-comment requirement when it issued the regulations in
these cases . T .D . 8168, 52 Fed . Reg . 48407 (Dec . 22, 1987)
( Kikalos ) ; T .D . 7991, 49 Fed . Reg . 46992 (Nov . 30, 1984)
( UnionBanCal ) .

"If respondent had successfully promulgated interpretive
rules, we would reach this same point .

- 63 Hickman, "A Problem of Remedy",

supra at 1197 n .199 (suggesting

invalidated regulations may be similar in force to proposed
regulations, which set forth the agency's views but do not bind
courts) . Respondent's problem .here is, that we have already
considered his position in other cases, and we have rejected it .
Bakersfield Energy Partners, LP v . Commissioner , 128 T .C . 207
(2007) ;

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

T .C . Memo . 2009-195 . He needs to have new regulations . that do
have binding force . These don't, and we therefore see no
compelling reason to vacate our decision in

Intermountain . For

that reason, we concur with the majority's-result .

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Abd2db58e3bd5a286. Public record. Not legal advice.