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On February 9, 2011, the third appellate court in as many weeks issued an opinion addressing whether an overstatement of basis extends the statute of limitations for assessment to six years under section 6501(e)(1)(A). In Burks v. United States, No. 09-11061 (Feb. 9, 2011) (opinion here), the Fifth Circuit joined the majority of circuit courts that have addressed the issue (including the Fourth, Ninth, and Federal Circuits, as well as the Tax Court) by holding that an overstatement of basis does not trigger the extended statute. At this point, only the Seventh Circuit has held to the contrary, and the Seventh Circuit’s recent precedent lies on a broad and now-questionable reading of Fifth Circuit precedent, Phinney v. Chambers 392 F.2d 680 (5th Cir. 1968), which the Fifth Circuit confined to its narrow facts.
The Fifth Circuit opinion provides a useful summary of the multiple opinions that have chosen not to limit Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) to cases involving a trade or business. See Burks, No. 09-11061 at 11-12. Although numerous courts have now held that Colony controls under the common law, only the Fifth and Fourth Circuits and the Tax Court have considered whether the Supreme Court’s Colony analysis “unambiguously” sheltered section 6501(e)(1)(A) from administrative intervention. See Nat’l Cable & Telecommunications Ass’n v. Brand X Nat’l Services, 545 U.S. 967, 982-83 (2005) (holding that an agency may overturn a judicial decision unless based on an “unambiguous” reading of a statute).
In a regulation promulgated in final form in December 2010, Treasury purported to strengthen the government’s judicial position by limiting Colony in the same manner argued in court. See Treas. Reg. § 301.6501(e)-1(a)(1)(iii). Thus, citing Brand X, the government has refocused its argument from whether Colony is distinguishable to whether its regulation overrode the decision. On this point, the Fifth Circuit followed the Fourth Circuit by citing dicta in Colony describing section 6501(e)(1)(A) as unambiguous.
Although the Fifth Circuit’s primary legal analysis offers little new (as it mostly recites and adopts other courts’ analyses), its opinion may still give hope for those who still believe in “tax exceptionalism.” (We have several here at the taxblawg.) Dicta in the opinion’s footnote nine may have reopened a smattering of questions that we thought the Supreme Court closed last month in Mayo Foundation v. United States, No. 09-837 (Nov. 8, 2010).
In Mayo, the Supreme Court said “principles underlying our decision in Chevron apply with full force in the tax context.” Thus, the tax bar generally took Mayo as relegating the less-deferential National Muffler standard to history, but the Fifth Circuit seems to have read Mayo more narrowly. In footnote nine, the Fifth Circuit implied that Mayo would not apply when Treasury promulgates a regulation in response to an adverse judicial decision – one of the key National Muffler factors. The Fifth Circuit opinion, therefore, calls for a reinspection of Mayo. Did the Supreme Court hold that Chevron deference always applies to tax regulations, or did it simply choose to apply Chevron over National Muffler in that particular case?
A literal reading of Mayo lends some support for a more narrow reading. Throughout Mayo, the Court confined its analysis narrowly, stating that it would apply Chevron “in this case,” and to “the rule at issue,” and the Court never explicitly agreed with the government’s argument that Chevron superseded National Muffler. Nonetheless, searching Mayo for the magic words that would explicitly lay National Muffler to rest seems to lose the forest for the trees.
The better view seems to be that the Court intended to squash National Muffler once and for all. The Court cited approvingly its previous holdings that precluded reliance on each of the National Muffler factors. For instance, the Fifth Circuit would have distinguished Mayo because the section 6501(e)(1)(A) regulation was promulgated in response to adverse judicial decisions. As noted by the Court, however, so had the regulation at issue in Mayo itself. Accordingly, the Court appears to have foresaw and foreclosed the Fifth Circuit’s basis for distinction, instructing future courts that “we have found it immaterial to our analysis that a regulation was prompted by litigation.” The Court’s preclusion of reliance on each of the National Muffler factors and its description of Chevron’s breadth signals a pretty clear intent to supersede National Muffler.
Even though the Fifth Circuit’s footnote may have read Mayo too narrowly, it’s not all bad news. Footnote nine may allow those leery of an overly deferential judiciary to sleep easier (as least in one respect). In the footnote, the Fifth Circuit said a notice-and-comment period is essential for Chevron deference, which is consistent with the Supreme Court’s instruction in Mayo. No. 09-837 at 12 (“Chevron provide[s] the appropriate standard … where the agency uses full notice-and-comment procedures[.]”). The requirement for notice and comment would seem to disqualify Revenue Rulings, Revenue Procedures, and the like from Mayo deference.
The question remains why, in dicta, the Fifth Circuit felt the need to distinguish Mayo. The court had no need to do so, as it found section 6501(e)(1)(A) unambiguous under Chevron step one. In any event, given that the overstatement-of-basis cases have split the circuit courts, the Supreme Court may soon receive another opportunity to clear up the vitality of National Muffler, this time in more explicit language.