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Tax Notes

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Tax Notes



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On September 29, 2009, Treasury issued regulations retroactively extending the six-year limitations period for income tax deficiencies resulting from basis overstatements. In its May 6 Intermountain decision, the Tax Court unanimously invalidated those regulations, but on divided rationales. The government has appealed.

lntermountain is a must-read for tax academics and practitioners. It is among the richest decisions on the procedural and substantive validity of tax regulations. Moreover, the opinions in the case, subsequent cases on the issue, .and commentary on these opinions and cases present genuine opportunity for improvement of the law.

This report has five sections. Section I sketches the growing significance of administrative law in tax law. The days of comfortable insularity are drawing to a close. To maintain dexterity in the years to come, tax practitioners and tax scholars will increasingly need to possess competence in broader principles of administrative law.

Intermountain is a harbinger of that growing necessity. Section II describes the background of the case, summarizes the three opinions rendered in it, and evaluates the result reached. I think that the Intermountain result is correct but (in terms of the arguments in the opinions) only on the procedural ground advanced by two concurring judges: that the regulations violate the Administrative Procedure Act (APA) for failure to satisfy the notice-and-comment requirements.

Sections III, IV, and V address some important aspects of Intermountain. My treatment is selective. Leaving some material for future discussion, I delve into three of the interesting veins of the case, including issues appearing in the opinions as well as issues omitted from them.

Section Ill discusses whether the regulations at issue in the case are legislative or interpretive in nature. This matters to the APA argument. Unless another exception applies (and none does in Intermountain), legislative regulations must go through notice-and-comment, but interpretive regulations need not. I conclude that the challenged regulations are legislative, and I urge tax practitioners to refine their definitions of legislative and interpretive regulations.

Section IV examines the light shed by Intermountain on the Brand X rule as to when agency rulemaking may displace prior judicial interpretations of statutes. I conclude that Intermountain and similar cases may help at one level: whether “magic words” must appear in the judicial interpretations. However, they are unlikely to help at two other levels: what should be done if the precedents’ characterizations are unsupportable, and whether the Brand X analysis of the underlying statute turns on the statute’s language or also embraces pertinent legislative history.

Section V explores two arguments that weren’t considered in the Intermountain opinions but that might be brought against the temporary regulations in future cases. One such argument is that the temporary regulations have not gone through the notice-and-comment process, and Chevron deference is rarely accorded to administrative rules and interpretations that were not subject to this process. This argunent is of short-term significance. It will evaporate after the regulations in their proposed form complete the process.

The other argument has to do with whether Congress explicitly or implicitly authorized Treasury to promulgate regulations extending section 6501(e) to overstated basis situations. The explicit authorization argument involves a contention I will develop at greater length in a future article. Briefly, the statutory authority under which the temporary regulations were promulgated allows Treasury to “prescribe all needful rules and regulations for the enforcement of” the code. It is arguable – although far from certain – that this language authorizes only rules that implement code provisions, not rules that extend code provisions to situations beyond the provisions’ original scope. If Congress did not explicitly authorize the rules at issue, it probably did not implicitly authorize them, either. Section 6501 is a highly detailed and articulated statute; courts usually are disinclined to allow other, extrinsic rules to be read into such statutes to modify them.


© 2010 Steve R. Johnson


First published in Tax Notes.

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