The same issue came before the Tax Court for later years. On appeal from the Tax Court, the Tenth Circuit has just reversed the Tax Court and come out on the opposite side of the critical issue from the Federal Circuit. 107 AFTR 2d 2011-XXXX (10th Cir., May 31, 2011). That issue is whether the six year or the three year statute of limitations on assessments in section 6501 should apply. The Tenth Circuit ruled that the six year statute should apply to a basis understatement, even though the statute appears to require an omission from gross income to allow the six year statute of limitations. The significance of the decision is that it may mark a growing deference toward Treasury regulations.
The statute was interpreted by the Supreme Court in Colony v. Commissioner, 357 U.S. 28 (1958) in favor of the three year statute of limitations. But after Salman II, the Treasury issued temporary and then permanent regulations taking the position it took in this litigation. The issue was whether the court should give “Chevron deference” to those regulations. Chevron was a 1984 Supreme Court opinion that appeared to announce a new deference to agency regulations. It has taken a few decades for tax cases to catch up.
The first step in the Chevron analysis is whether the statute is ambiguous. If it is ambiguous, then the Treasury has substantial leeway to interpret it in regulations within the bounds of reason. The Tenth Circuit read the Colony opinion to find the statute ambiguous. It did so in part because the Supreme Court looked at legislative history to interpret the statute and also because the Tenth Circuit did not believe even the legislative history was dispositive.
Once a court decides a statute is ambiguous for purposes of Chevron step one analysis, “school is out.” The agency then has great flexibility to interpret the statute within the realm of reason. The fact that it interpreted the statute different from the Supreme Court in Colony, is not a problem, under the Chevron progeny.
Thus, because the Tenth Circuit found the Treasury’s regulation was a “permissible” interpretation, IRS won. Moreover, because the Treasury had issued final regulations between Salman II and this case, collateral estoppel did not apply because the facts had changed!
Tax folks have had to learn about Chevron deference recently because the Supreme Court has recently said tax regulations are not “special.” Mayo Found.for Med. Educ. & Research v. United States, 131 S. Ct. 704, 713 (2011). The new Salman decision is evidence of a new day in Treasury regulations.
The Treasury and IRS beat up on the Son of Boss transaction pretty hard. See Cummings, Economic Substance Doctrine Felonies, 2011 TNT 104-10 (May 31, 2011). As shown in this case they hurried out a temporary regulation in the middle of a case and argued it was retroactive (in Salman II) and now they have won the Chevron argument over the validity of those regulations. Add this together with the recently codified economic substance doctrine, and a taxpayer may have to be pretty bold to disagree with the IRS. Is this the way to run a railroad?
The Chevron deference has been promoted by a conservative Supreme Court. In a way it seems odd that such a Court would promote agency control over the law through regulations. Chances are that when the Court sees a regulation it does not like, it will find a way to find the statute unambiguous. But it is still curious that the Court sides with the tax collector.