Supreme Court Refuses to Defer to IRS Interpretation of a Statute of Limitations

The Supreme Court held yesterday that the IRS has just three years to bring a deficiency action against a taxpayer that reduces its tax liability by overstating basis instead of omitting gross income–not six years as the IRS argued.  Yesterday’s decision in United States v. Home Concrete & Supply effectively overrules the D.C. Circuit’s decision in Intermountain Insurance Service of Vail, LLC v. Commissioner of the Internal Revenue, which had deferred to the IRS’s broad interpretation of the six-year statute of limitations for “omi[ssions] from gross income.”

The Supreme Court rejected the IRS’s claim to deference, because in the 1958 case of Colony, Inc. v. Commissioner, the  Court had interpreted a practically identical statute to exclude from the six-year limitation period deficiencies resulting from overstatements of basis.

The Supreme Court’s decision comes on the heels of a concurrence by Judge Brown in an unrelated case, in which she obliquely criticized the Intermountain panel’s deference to the IRS’s interpretation of the statute of limitations.  Judge Brown observed that “statutes of limitations are designed to constrain the government’s enforcement authority,” and she urged her court to “resist the reflex of deference” when the interpretation in question goes to the agency’s own jurisdiction.

The Supreme Court did not adopt Judge Brown’s proposed wholesale exception to Chevron for statutes of limitations in yesterday’s decision, but the Home Concrete plurality does point in the direction of more strenuous judicial review of agency interpretations.

Justice Breyer’s opinion, joined by Chief Justice Roberts, Justice Thomas, and Justice Alito, endorses a robust version of Chevron Step One that could dramatically influence the D.C. Circuit’s administrative law docket.  (Justice Scalia disagreed on this point.)  According to the plurality, deference to an administrative agency is improper unless Congress has truly left a gap for the agency to fill.  Mere “linguistic ambiguity” is not sufficient to create such a gap.  Rather, the reviewing court must “employ[] traditional tools of statutory construction” to discern Congressional intent.  Only if the statute’s meaning remains ambiguous should the court defer to a reasonable agency interpretation.

What are the traditional tools of statutory construction?  Justice Breyer’s opinion does not offer a full list, but it cites the textual analysis, legislative history, and structural analysis employed in Colony.

The Home Concrete plurality clarifies that Brand X–the case that held an agency is entitled to deference even when it effectively overrules a judicial interpretation of the same statute–applies only when the prior court decision itself fills a gap in the statute rather than interpreting Congress’s unambiguous intent through the traditional tools of statutory construction.

From the Home Concrete Plurality Opinion:

[T]he Court decided that case nearly 30 years before it decided Chevron. There is no reason to believe that the linguistic ambiguity noted by Colony reflects a post-Chevron conclusion that Congress had delegated gap-filling power to the agency. At the same time, there is every reason to believe that the Court thought that Congress had “directly spoken to the question at hand,” and thus left “[no] gap for the agency to fill.”

It may be that judges today would use other methods to determine whether Congress left a gap to fill. But that is beside the point. The question is whether the Court in Colony concluded that the statute left such a gap. And, in our view, the opinion (written by Justice Harlan for the Court) makes clear that it did not.

United States v. Home Concrete & Supply, No. 11-139, 566 U.S. ___ (Apr. 25, 2012)

Intermountain Ins. Serv. of Vail, LLC, v. Comm’r, No. 10-1204 (D.C. Cir. June 21, 2011, amended Aug. 18, 2011) (Tatel, J., joined by Sentelle, C.J., & Randolph, S.J.)

AKM LLC, dba Volks Constructors v. Sec’y of Labor, No. 11-1106 (Brown, J., joined by Henderson, J., with Garland, J., concurring in the judgment, and concurring opinion by Brown, J.)

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