The Supreme Court last week ruled 5-4 in favor of the taxpayer in Home Concrete, thus putting an end to the long-running saga of the Intermountain litigation on which we have been reporting for the past 18 months.  The opinion was authored by Justice Breyer and joined in full by three other Justices, but Justice Scalia joined only in part.  The result is a definitive resolution of the specific tax issue – the six-year statute of limitations does not apply to an overstatement of basis.  But the Court’s decision provides a much less definitive resolution of the broader administrative law issues implicated in the case.

As foreshadowed by the oral argument (see our previous report here), the tax issue turned on the continuing vitality of the Court’s decision in The Colony, Inc. v. Commissioner, 357 U.S. 28 (1958).  To recap, the Court held in Colony that the “omits from gross income” language in the 1939 Code did not encompass situations where the return understates gross income because of an overstatement of basis, and hence the extended six-year statute of limitations did not apply in those situations.  The government argued that Colony did not control the interpretation of the same language in current section 6501(e) of the 1954 Code, because changes elsewhere in that section suggested that Congress might have intended a different result in the 1954 Code.

The administrative law issues came into play because, after two courts of appeals had ruled that Colony controlled the interpretation of the 1954 Code, the government tried an end run around that precedent.  Treasury issued regulations interpreting the “omits from gross income” language in the 1954 Code as including overstatements of basis, thus bringing those situations within the six-year statute of limitations.  Under National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967 (2005), the government argued, an agency is empowered to issue regulations that define a statute differently than an existing court decision, so long as the court decision did not declare the statutory language unambiguous.  Because the Colony opinion had indicated that the 1939 Code language standing alone was “not unambiguous,” the government argued that Treasury’s new regulations were entitled to Chevron deference, which would supplant any precedential effect that Colony would otherwise have on the interpretation of the 1954 Code provision.

The Court’s Opinion

Justice Breyer wrote the opinion for the Court, joined in full by Chief Justice Roberts and Justices Alito and Thomas.  Justice Scalia joined Justice Breyer’s analysis of the statute, but departed from his analysis of the administrative law issues.

The opinion dealt straightforwardly with the basic tax issue.  First, the Court emphasized that the critical “omits from gross income” language in the current statute is identical to the 1939 Code language construed in Colony, and it recounted the Colony Court’s reasoning that led it to conclude that the language does not encompass overstatements of basis.  Colony is determinative, the Court held, because it “would be difficult, perhaps impossible, to give the same language here a different interpretation without effectively overruling Colony, a course of action that basic principles of stare decisis wisely counsel us not to take.”  With respect to the statutory changes made elsewhere in section 6501(e), the Court concluded that “these points are too fragile to bear the significant argumentative weight the Government seeks to place upon them.”  The Court addressed each of these changes and concluded that none called for a different interpretation of the key language (and that one of the government’s arguments was “like hoping that a new batboy will change the outcome of the World Series”).

The Court then turned to the administrative law issues, reciting the government’s position that, under Brand X, the new regulations were owed deference despite the Court’s prior construction of the language in Colony.  The opinion first responded to that position with a two-sentence subsection:  “We do not accept this argument.  In our view, Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency.”

Standing alone, that was not much of a response to the government’s Brand X argument, because Brand X said that the agency can adopt a construction different from that provided in a prior court decision so long as the statute was ambiguous.  These two sentences were enough for Justice Scalia, however, and he ended his agreement with Justice Breyer’s opinion at this point.  In a separate concurring opinion, Justice Scalia explained that he is adhering to the view expressed in his dissent in Brand X that an agency cannot issue regulations reinterpreting statutory language that has been definitively construed by a court.

With the other Justices in the majority not feeling free to ignore Brand X, Justice Breyer’s opinion (now a plurality opinion) then proceeded to explain why Brand X did not require a ruling for the government.  According to the plurality, Brand X should be given a more nuanced reading than that urged by the government, one that looks to whether a prior judicial decision found a statute to be “unambiguous” in the sense that the court concluded that Congress intended to leave “‘no gap for the agency to fill’ and thus ‘no room for agency discretion.’”  Under Chevron jurisprudence, the opinion continued, unambiguous statutory language provides a “clear sign” that Congress did not delegate gap-filling authority to an agency, while ambiguous language provides “a presumptive indication that Congress did delegate that gap-filling authority.”  That presumption is not conclusive, however, and thus this reading of Brand X leaves room for a court to conclude that a judicial interpretation of ambiguous statutory language can foreclose an agency from issuing a contrary regulatory interpretation.  In support of that proposition, the plurality quoted footnote 9 of Chevron, which states that “[i]f a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect.”

The plurality then ruled that the Court in Colony had concluded that Congress had definitively resolved the legal issue and left no gap to be filled by a regulatory interpretation.  Given its analysis of the scope of Brand X, the plurality explained that the Colony Court’s statement (26 years before Chevron) that the statutory language was not “unambiguous” did not necessarily leave room for the agency to act.  Rather, the Colony Court’s opinion as a whole – notably, its view that the taxpayer had the better interpretation of the statutory language and had additional support from the legislative history – showed that the Court believed that Congress had not “left a gap to fill.”  Therefore, “the Government’s gap-filling regulation cannot change Colony’s interpretation of the statute,” and the Court today is obliged by stare decisis to follow it.

The Concurring and Dissenting Opinions

Justice Kennedy’s dissent, joined by Justices Ginsburg, Sotomayor, and Kagan, reached a different conclusion on the basic tax dispute.  The dissent looked at the statutory changes made in the 1954 Code and concluded that they are “meaningful” and “strongly favor” the conclusion that the “omits from gross income” language in the 1954 Code should not be read the way the Colony Court read that same language in the 1939 Code.  Given that view, the administrative law issue – and the resolution of the case – became easy.  The dissent stated that the Treasury regulations are operating on a blank slate, construing a statute different from the one construed in Colony, and therefore they are owed Chevron deference without the need to rely on Brand X at all.

Justice Scalia’s concurring opinion declared a pox on both houses.  He was extremely critical of the plurality’s approach, accusing it of “revising yet again the meaning of Chevron . . . in a direction that will create confusion and uncertainty.”  He also criticized the dissent for praising the idea of a “continuing dialogue among the three branches of Government on questions of statutory interpretation,” when the right approach should be to say that “Congress prescribes and we obey.”  Justice Scalia concluded:  “Rather than making our judicial-review jurisprudence curiouser and curiouser, the Court should abandon the opinion that produces these contortions, Brand X.  I join the judgment announced by the Court because it is indisputable that Colony resolved the construction of the statutory language at issue here, and that construction must therefore control.”

What Does It Mean?

The Home Concrete decision provides a clear resolution of the specific tax issue.  The six-year statute of limitations does not apply to overstatements of basis.  The multitude of cases pending administratively and in the courts that involve this issue will now be dismissed as untimely, leaving the IRS unable to recover what it estimated as close to $1 billion in unpaid taxes.

Indeed, in a series of orders issued on April 30, the Court has already cleared its docket of the other Intermountain-type cases that had been decided in the courts of appeals and kept alive by filing petitions for certiorari.  In Burks and the other Fifth Circuit cases in which the taxpayers had prevailed, the Court simply denied certiorari, making the taxpayers’ victory final.  For the certiorari petitions filed from courts of appeals that had sided with the government, such as Grapevine (Federal Circuit), Beard (Seventh Circuit), Salman Ranch (Tenth Circuit), and Intermountain and UTAM (D.C. Circuit), the Court granted the petitions and immediately vacated the court of appeals decisions and remanded the cases to the courts of appeals for reconsideration.  Now constriained by Home Concrete, those courts will enter judgments in favor of the taxpayers in due course.

Notably, although the retroactive nature of the Treasury regulations was a significant point of contention in the litigation, retroactivity did not play a role in the final resolution.  The Court held that Colony is controlling and leaves no room for the agency to construe the “omits from gross income” language differently.  Thus, Treasury does not have the ability to use its regulatory authority to extend the six-year statute to overstatements of basis even prospectively.  Any such extension will have to come from Congress.

The effect of the decision on administrative law generally is considerably more muddled.  First, a couple of observations on what the Court did not do.  It did not signal any retreat from Mayo.  Treasury regulations addressed to tax issues will continue to be judged under the same Chevron deference principles that apply to regulations issued by other agencies.  Furthermore, as noted above, the Court did not rely on the retroactive aspect of the regulations.  Thus, the decision does not provide guidance one way or another on the extent to which Treasury is constrained in its ability to apply regulations to earlier tax years.

What the Court did do, however, is to weaken the authority of Brand X.  Under the reasoning of Justice Breyer’s plurality opinion, courts are now free to decline to defer to a regulatory interpretation that construes ambiguous statutory language – if the court concludes that a prior court decision, using “traditional tools of statutory construction” that go beyond the text, determined that Congress intended to resolve the issue rather than leave a gap for the agency to fill.  Although there were only four votes for that proposition, Justice Scalia’s approach would lead him to agree with such a result just as he did in Home Concrete, so lower courts may treat the plurality opinion as controlling.  There is, however, room for debate about the impact of the Home Concrete approach.  Justice Breyer’s opinion emphasizes the fact that Colony was decided long before Chevron, and lower courts may disagree regarding its impact when the court decision at issue is post-Chevron and, in particular, post-Brand X.  At a minimum, the Home Concrete decision should make agencies less confident in their ability to use regulations to overturn judicial interpretations of statutes and should give taxpayers more ammunition to challenge such regulations if necessary.

Interestingly, Justice Breyer’s approach, and in particular his invocation of Chevron’s footnote 9 reference to “traditional tools of statutory construction,” was previewed in the argument in the Federal Circuit in the Grapevine case.  As we reported at the time, that argument involved considerable discussion of whether the determination of “ambiguous” at Chevron step 1 must be based entirely on the statutory text, as Brand X suggests, or can be based on other “traditional tools of statutory construction,” as Chevron footnote 9 declares.  In its decision, the Federal Circuit stuck to the statutory text and ruled for the government.

Justice Breyer’s opinion, however, supports the proposition that Chevron step 1 analysis can look beyond the statutory text.  If that portion of Justice Breyer’s opinion had commanded a majority, it would be extremely significant because it would justify looking beyond the statutory text not only in assessing the impact of Brand X when there is a court decision on the books, but also in considering a Chevron deference argument in the first instance.  A court could decide, under the approach suggested by Justice Breyer, that a statute whose text standing alone is ambiguous nonetheless leaves no room for agency interpretation – if other tools of statutory construction show that Congress intended to resolve the issue rather than leaving a gap for the agency.  On this point, however, the plurality opinion cannot be treated as controlling because Justice Scalia would surely look askance at a decision that used legislative history to find a lack of ambiguity at Chevron Step 1.  By the same token, the dissenters had no occasion to address this point, so we do not know if any of them would have agreed with Justice Breyer’s approach.  For now, it is fair to say that Justice Breyer has heightened the visibility and potential importance of Chevron footnote 9, but that Home Concrete alone probably will not yield a significant change in how courts approach Chevron step 1.

In sum, Home Concrete may be a bit of a disappointment to those observers who thought that the decision would bring great clarity to the administrative law issues presented.  In that respect, it joins a long list of administrative law cases that reach the Supreme Court and seem to yield as many questions as answers.  But for the taxpayers with millions of dollars riding on the difference between a three-year and six-year statute of limitations, the decision is not disappointing at all.  It is a huge victory.

Supreme Court opinion in Home Concrete

In 2000-2001, taxpayer Jeffrey Bergmann was a tax partner in KPMG’s Stratecon Group, which the Tax Court characterizes as “focused on designing, promoting and implementing aggressive tax planning strategies for high-net-worth individuals.”  In tax years 2000 and 2001, Bergmann entered into a “Short Option Strategy” transaction promoted by fellow KPMG partner Jeffrey Greenberg.  This transaction was identified by the IRS as an abusive tax shelter in Notice 2000-44, 2000-2 C.B. 255 (transactions generating losses by artificially inflating basis).  The taxpayers (Bergmann and his wife) claimed losses for the 2000 and 2001 Short Option Strategy transactions on their 2001 return, but filed an amended return in March 2004 removing the losses attributable to the transactions and paying approximately $200,000 in additional tax.  The IRS treated the qualified amended return as untimely and assessed accuracy-related penalties.

Under Treas. Reg. § 1.6664-2(c)(3)(ii), as in effect when the Bermanns filed their amended return, the time to file a qualified amended return terminates when the IRS first contacts a person “concerning” liability under section 6700 (a promoter investigation) for an “activity” with respect to which the taxpayer claimed a tax benefit.  The IRS served KPMG with two summonses in March 2002, one of which was specifically targeted at KPMG’s involvement in promoting transactions covered by Notice 2000-44.  Attempting to disassociate their transaction from those that were the subject of the KPMG investigation, the taxpayers argued that Greenberg acted in his individual capacity in advising them, not as an agent of KPMG.  The Tax Court rejected this argument, concluding that the transactions in which the taxpayers engaged were within the scope of Greenberg’s responsibilities as a KPMG partner and also concluding that KPMG had not limited Greenberg’s authority to engage in Notice 2000-44 transactions with other KPMG partners, including Bergmann.   The Tax Court also rejected the taxpayers’ argument that the promoter investigation must specifically identify the “activity” that gave rise to the tax benefit.  The Tax Court held that the summons need only refer to the “type” of transaction in which the taxpayer participated.  The court found that the March 2002 summons met this requirement because it specifically identified the transaction as the same or substantially similar to the transaction identified in Notice 2000-44.

The Tax Court noted that disclosure of the transaction after the Notice 2000-44 summons was served on KPMG would not have been voluntary.  The Tax Court explained that the purpose of the promoter provision is to encourage taxpayers to voluntarily disclose abusive tax shelters.  That purpose is effectuated by terminating the period to file a qualified amended return when disclosure would no longer be voluntary.

The Tax Court addressed a second issue as well.  At first glance, the taxpayers appeared to be subject to the 40% gross overvaluation penalty because the scheme depended on what was found to be an artificially inflated based.  They argued, however, that the tax underpayment was not “attributable to” the overvaluation because the Commissioner contended (and the taxpayers eventually conceded) that the entire transaction should be disallowed for lack of economic substance, thereby making the valuation irrelevant.  The Tax Court noted that this type of bootstrapping argument has been rejected by several circuits, which have held that the 40% penalty applies when overvaluation is intertwined with a tax avoidance scheme, but that Ninth Circuit precedent has accepted the argument.  Keller v. Commissioner, 556 F.3d 1056.  Accordingly, the Tax Court rejected the IRS’s attempt to impose a 40% penalty, and the taxpayers were assessed only the standard 20% accuracy-related penalty.  The IRS has not appealed this issue.

The taxpayers’ opening brief is due on May 16.  The case is docketed in the Ninth Circuit as No. 12-70259.

Tax Court Opinion

The government has appealed the Tax Court’s decision on interest netting in Exxon Mobil Corp. v. Commissioner, 136 T.C. No. 5 (Feb. 3, 2011).  The briefing is now complete, and the Second Circuit (Judges Cabranes, Walker, and Winter) is scheduled to hear oral argument on April 25.

Congress expressly required global interest netting by enacting Code section 6621(d) in 1998.  Before then, the IRS had sometimes taken advantage of the differential interest rates established in 1986 to collect net interest when no net tax was due.  Specifically, for periods of overlapping indebtedness where the taxpayer owed money to the government for one tax year but the government owed money to the taxpayer for a different tax year, the government would not net the overlapping amounts, but rather would collect interest at the higher underpayment rate while paying interest to the taxpayer at the lower overpayment rate on the same amount.  Section 6621(d) ended this practice by providing that “the net rate of interest . . . on such amounts” of overlapping indebtedness “shall be zero.”  That net rate of zero can be implemented either by increasing the overpayment rate or decreasing the underpayment rate from what they would otherwise be in the absence of interest netting.  Section 6621(d) applies prospectively without restriction, but Congress also enacted a “special rule” that makes the interest netting rule also apply to pre-1998 periods of overlapping indebtedness in certain circumstances.  The Exxon Mobil case involves the construction of that special rule.

The special rule provides that section 6621(d) applies to past periods “[s]ubject to any applicable statute of limitation not having expired with respect to either a tax underpayment or a tax overpayment” on the July 22, 1998, effective date of section 6621(d).  Taxpayers interpret this provision to mean that interest netting is available for past periods so long as the statute of limitations for either of the overlapping periods of indebtedness was open on the effective date.  The IRS, however, has interpreted the special rule to mean that interest netting is available for past periods only if the statute of limitations for both of the overlapping periods of indebtedness was open on the effective date.

The issue was first litigated by Fannie Mae in the Court of Federal Claims, which held that the special rule was best read in accordance with the taxpayer’s position.  The Federal Circuit, however, reversed.  Federal National Mortgage Ass’n v. United States, 379 F.3d 1303 (Fed. Cir. 2004), rev’g, 56 Fed. Cl. 228 (2003).  The Federal Circuit did not take issue with the statutory analysis of the Court of Federal Claims, but instead relied on an argument that was not presented below.  The Federal Circuit reasoned that the special rule was a waiver of sovereign immunity that must be strictly construed in favor of the government; since the statutory language was capable of being read to support either position, the court concluded, that strict construction principle required a ruling in the government’s favor.

The Exxon Mobil case raises the same issue, but it arises in a different procedural posture and hence in a different jurisdiction.  Exxon petitioned the Tax Court for a redetermination of deficiencies for its 1979-1982 tax years, and the Tax Court’s determination eventually resulted in an overpayment.  The IRS paid interest on that overpayment at the regular overpayment rate, unadjusted for the fact that interest netting principles would have called for a higher rate because there was a period of overlapping indebtedness with underpayments that Exxon owed for the 1975-78 tax years.  Exxon Mobil then filed a motion for redetermination of interest under Code section 7481 seeking additional overpayment interest through application of the interest netting rule of section 6621(d).

The IRS argued that interest netting did not apply because the statutes of limitations for the 1975-78 tax years were no longer open on July 22, 1998, although it acknowledged that the statutes of limitations for the overpayment leg of the overlap period were open on that date.  The Tax Court declined to follow the Federal Circuit’s view and rejected the IRS’s argument.  The Tax Court stated that “the special rule is not a waiver of sovereign immunity but an interest rate provision.”  It added that, even if it were a waiver of sovereign immunity, that would not require the court to adopt a reading that contravened Congress’s intent to achieve the remedial purpose of relieving taxpayers from paying interest when no net tax was due.

The government’s brief on appeal relies heavily on the Federal Circuit’s decision in Fannie Mae.  It argues that the Tax Court erred in rejecting the basic principle of that decision, asserting that “the special rule is a waiver of sovereign immunity because it authorizes recovery of certain retroactive refund claims for overpaid interest and thus ‘discriminates between those claims for overpaid interest Congress has authorized and those it has not’” (quoting Fannie Mae, 379 F.3d at 1310).  Exxon Mobil’s brief first addresses the special rule independently, asserting that the natural reading of the text and the evident purpose of the special rule both indicate that Congress intended to allow interest netting for pre-1998 periods so long as one leg of the overpayment period was open.  The brief then addresses the government’s sovereign immunity argument, arguing that the special rule is not a waiver of sovereign immunity and, even if it were, the canon of construction would not justify adopting an interpretation that would thwart the evident intent of Congress.

Exxon Mobil – Government’s Opening Brief

Exxon Mobil – Taxpayer’s Answering Brief

Exxon Mobil – Government’s Reply Brief

Tax Court Opinion

There were two basic arguments made for holding that the health care lawsuits could proceed despite the Anti-Injunction Act.  The primary argument was that the Act by its terms did not apply – that is, that for a variety of reasons the “penalty” for failing to obtain health insurance is not a “tax” within the meaning of the Anti-Injunction Act.  Both the challengers to the health care legislation and the United States took this position.  Preliminary to this statutory interpretation question, however, was the argument that the Anti-Injunction Act should not apply in this case — even if the health care penalty would ordinarily come within the ambit of the Anti-Injunction Act — because the government had waived the defense and urged that the lawsuits should proceed.  The validity of that waiver argument turns on whether the Anti-Injunction Act is “jurisdictional,” meaning that it addresses a court’s jurisdiction or power to hear a case, as opposed to being a “claim processing rule.”

A court does not have the authority to create its own jurisdiction, even if both parties want it to hear the case.  Thus, if a statute is “jurisdictional,” a court is obliged to examine jurisdiction on its own and to dismiss the case if it finds that the statutory conditions are not met.  Conversely, if a statutory condition is not jurisdictional, then a party can waive satisfaction of that condition and the court can proceed to hear the case.  (For example, many exhaustion requirements or statutes of limitations are not jurisdictional, see Reed Elsevier, Inc. v. Muchnick, 130 S. Ct. 1237 (2010); Day v. McDonough, 547 U.S. 198, 205-06 (2006)).  In the health care litigation, although the United States wanted the lawsuits to proceed, it took the position that the Anti-Injunction Act is “jurisdictional” and therefore (in contrast to the challengers to the law) argued that the Court could proceed to hear the case only if it concluded that the Anti-Injunction Act by its terms did not apply to the “penalty” for failing to obtain insurance.

If the Court were to resolve the case on waiver grounds, concluding that the Anti-Injunction Act is not jurisdictional, that could create opportunities for taxpayers in future cases if a government attorney overlooks an Anti-Injunction Act defense.  It also would give the government flexibility to assert the defense when it wants, but to allow cases like the health care challenge to go forward if the government determines that it wants a prompt answer.  The government, however, is concerned about a holding that the Anti-Injunction Act is not jurisdictional, because courts are freer to adopt equitable exceptions to non-jurisdictional statutes.

At the oral argument, the Justices explored both possible grounds for resolving the issue.  Chief Justice Roberts and Justice Alito seemed the most interested in concluding that the Act is not jurisdictional and thus giving effect to the government’s waiver.  Roberts described as the “biggest hurdle” to the Anti-Injunction Act argument a 1938 case in which the Court had gone ahead and decided an issue apparently barred by the Act after the government had waived its defense.  When counsel responded that the case was no longer good law and pointed out that the Court had since repeatedly referred to the Act as “jurisdictional,” Alito forced him to concede that the Court had never actually held that the statute was “jurisdictional” in a case where that characterization would make a difference.  Justices Ginsburg, Kagan, and Sotomayor all joined in that line of questioning, pointing to similarly worded statutes or precedents that in Justice Sotomayor’s words indicated that “Congress has accepted that in the extraordinary case we will hear the case.”

As the argument progressed, however, it appeared less likely that a majority would coalesce around this position.  Justice Breyer volunteered that he was inclined to agree that the Anti-Injunction Act is jurisdictional, but that he doubted it applied to the health care legislation.  Sotomayor indicated that she thought this position, which is what was being espoused by the government, was the least problematic.  Justice Ginsburg suggested that she sided with the position that the Act did not apply, observing that this conclusion would make it unnecessary to resolve the thornier “jurisdictional” question.

Although it is always hazardous to predict outcomes based on questions asked at oral argument, the most likely outcome appears to be that the majority of Justices will address the merits of the Anti-Injunction Act issue, rather than relying on the government’s waiver of the defense.  If so, the decision will not foreclose courts in the future from applying the Anti-Injunction Act when the government has failed to raise the defense or deliberately chosen not to raise it.

A decision is expected in the last week of June, perhaps June 28, and will surely be overshadowed by the Court’s contemporaneous decision on the constitutionality of the health care legislation.

On March 29, 2012, the Second Circuit heard oral arguments in Union Carbide Corp. & Subsidiaries v. Commissioner, No. 11-2552 (Judges Straub, Pooler & (visiting district court Judge) Korman on the panel ).  The case involves Union Carbide Corp’s (“UCC’s”) claim for research and experimentation credits with respect to 106 research projects.  In order to resolve the issues expeditiously, the parties agreed that the Tax Court would limit trial to the five largest projects.  All five projects involved process experimentation after products were placed in commercial operation.  For two of the five projects, the Tax Court held that the projects involved qualified research, but it determined that the costs of materials incurred to produce the commercial product necessary for UCC to conduct the process research were not eligible for the credit.  UCC has appealed this holding, as well as the Tax Court’s separate conclusion that one of the other projects did not involve a process of experimentation because UCC did not conduct additional post-test analysis after it determined that the test was successful.  The Second Circuit’s decision with respect to the costs of materials issue could have widespread implications for taxpayers claiming the research credit.

Background Regarding the R&E Credit.  To be eligible for the research credit under section 41(a)(1) of the Code, a taxpayer must show that it has performed “qualified research.”  To be qualified research:  (1) the research must be eligible as research under section 174 of the Code; (2) the research must be undertaken for the purpose of discovering technological information; (3) the taxpayer must intend for the discovered information to be useful in the development of a new or improved business component; and (4) substantially all of the research activities must constitute elements of a process of experimentation.  These tests are applied separately to each “business component.”  Section 41(d)(2)(C) provides that the development of an improved process is a separate business component from the product being produced.  At the same time, the Code generally provides in section 41(d)(4)(A) that research conducted after the beginning of commercial production of the business component is not eligible for the research credit.  Because the products in issue were all in commercial production, the “improved process” rule is critical to UCC’s position to avoid the expenses from being declared ineligible for the research credit under section 41(d)(4)(A).

The research credit is computed by reference to qualified research expenses (“QREs”), including “any amount paid or incurred for supplies used in the conduct of qualified research . . .” other than land, improvements to land, and depreciable property.  I.R.C. § 41(b)(2)(A).  In a post-Union Carbide decision, TG Missouri v. Commissioner, 133 T.C. 278 (2009), the IRS did not challenge, and the Tax Court allowed without discussion, the inclusion in the QREs of material costs for production molds sold to clients.  In Trinity Industries v. United States, 691 F.Supp. 2d 688, 697 (2010), the U.S. District Court for the Northern District of Texas expressly allowed the material costs incurred to construct ships because it concluded that the costs “are properly considered research expenditures in that the business component – the ship – could not have been developed without them.” 

The Parties’ Briefs with Respect to the Supplies Argument.   As previously noted, although the Tax Court agreed that 2 of the 5 projects in issue were qualified research and that the experiments could not have occurred without the supplies claimed by UCC (a process cannot be tested unless it is applied to the production of the product), it concluded that the supplies were not “used in the conduct of” the process of experimentation with respect to process development.  Instead, the court allocated the supply costs to the product business component and disallowed all the supplies claimed.  In essence, the court established a primary purpose test, and concluded that the primary purpose of the expenditures was to produce the commercial product, not to conduct research.  In this context, the Tax Court noted that the supply costs in issue were “at best, indirect research expenditures excluded from the definition of QREs.”

In its briefs, UCC argues that the Tax Court has created an inappropriate distinction between product and process experimentation.  It maintains that the Tax Court erred when it created two new requirements, i.e., that in addition to being used in the conduct of research, the costs must have been “primarily” incurred as a result of the process experimentation, and that supplies incurred both to produce a product and to be used in process experimentation are not primarily incurred in process experimentation.  There is nothing in the Code, regulations or legislative history to indicate that the qualification of supplies as QREs turns on whether they are incurred with respect to process or product experimentation.  Moreover, there is nothing in the Code, regulations or legislative history that either creates a hierarchy that would allocate the costs solely to the production of the product or disallows such costs as “indirect costs.”  UCC argues that the Second Circuit should apply the plain meaning of the statute, which provides that costs “used in the conduct of qualified research” qualify for the credit.  There is no dispute that UCC could conduct its process experimentation only if it produced the product in issue.  As a result, UCC maintains that the material costs were necessary for the process experimentation, were at risk in that experimentation, and therefore, must be included in the QREs.

As noted by UCC, the government in its brief did not attempt to reconcile the Tax Court’s decisions in UCC and TG Missouri, or the Trinity decision.  It distinguished these other two decisions as involving product rather than process experimentation, stating “in each of these cases . . . the supply costs found to be eligible for the credit were the direct, incremental cost of performing the qualified research.”  The focus of the government’s argument in its brief is that the costs of supplies to produce goods for sale are “indirect research expenses,” which are excluded from the definition of QREs under Treas. Reg. § 1.41-2(b)(2) because they are expenses that would have been incurred regardless of any research activities.  The government argues that Congress intended that only the incremental costs arising from the research are sufficiently “direct” to qualify as QREs.  For support, it cites other limitations restricting the availability of the credit – such as the limitations on qualified research to a discrete business component or to pre-commercial production.  It further asserts that it is unreasonable to claim supply costs that otherwise would have been incurred in commercial production.

The Potential Impact.  As noted in an amicus brief filed by the National Association of Manufacturers, the American Chemistry Council, and the Chamber of Commerce of the United States, the Second Circuit decision could have a wide impact on U.S. manufacturers.  If the Tax Court’s decision is sustained, the incentive that Congress intended by allowing the research credit could be significantly curtailed.  Moreover, as pointed out by both the amicus brief and UCC, such a decision would ignore the significant risks associated with process research and create an inappropriate distinction between product and process research.  However, there could be an even worse result for taxpayers than an affirmance of the Tax Court decision.  As noted by UCC in its briefs, the government’s argument that production costs are not QREs could be extended to product research.  If the Second Circuit accepted that extension, it could conclude that only incremental production costs qualify as QREs, a decision that would have much broader ramifications and that would be at odds with the decisions in both TG Missouri and Trinity.  Time will tell.

We will return soon with a report on the oral argument.

Union Carbide – Taxpayer’s Opening Brief

Union Carbide – Government’s Answering Brief

Union Carbide – Taxpayer’s Reply Brief

Union Carbide – Amicus Brief

Tax Court Opinion 

But leading all of this off on March 26 in HHS v. Florida, No. 11-398, is a tax issue – whether the challenges to the law are barred by Code section 7421, the Tax Anti-Injunction Act.  Former Solicitor General Paul Clement is slated to argue the other three issues for the challengers to the law, but has left the tax issue for someone else.  He remarked (tongue-in-cheek, I believe) that the Court was playing a “practical joke” on the public in its scheduling and that the folks who wait in line all night to attend the first day of arguments on March 26 are going to end up sitting through “the most boring jurisdictional stuff one can imagine.”  Tax lawyers might disagree (or they might not).  Either way, the section 7421 issue could hijack the case and have the effect of prolonging the uncertainty over the constitutionality of the law for several more years.

The issue is simple on its face.  Section 7421 forbids federal courts from maintaining any suit “for the purpose of restraining the assessment or collection of any tax.”  Rather, one generally must wait until the tax is imposed and then contest the liability through a refund claim or in defending against an enforcement proceeding. The individual mandate in the statute is enforced by imposing a “penalty” on individuals who are required to purchase insurance but fail to do so.  The relevant provision is section 5000A of the Internal Revenue Code, which requires individuals to report on their tax return information about their compliance with the mandate and pay a penalty if necessary.  That Code section also generally provides that the amounts owed are to be assessed and collected in the same manner as other penalties under the Code.

If the health insurance penalty is a “tax” subject to section 7421, then the current challenges to the mandate (which in essence are challenging the imposition of a penalty for failure to purchase insurance) are premature.  Rather, the legality of the penalty would have to be contested after it is imposed, like other taxes.  The individual mandate does not kick in until 2014, so an income tax return that self-reports penalty liability, thereby potentially triggering an assessment, would not be filed until 2015.  The Fourth Circuit adopted this view and dismissed a suit challenging the health care statute, telling the plaintiffs to come back in a few years.  Other circuits have disagreed, finding that, despite its presence in the Code and linkage to the assessment procedures for more conventional tax penalties (which are generally treated as “taxes”), the health care penalty has nothing to do with income tax and ought not to be governed by section 7421.  Of course, the issue is not that simple.   A concise and more nuanced summary of the respective arguments can be found in this article (see page eight) by our colleague George Hani.

One interesting sidelight to the Court’s consideration of this issue is that the Court had to appoint counsel to argue that section 7421 bars the suit.  The challengers, of course, have argued all along that section 7421 is no bar.  The government initially raised section 7421 as a defense, but later reversed course and abandoned that position because it did not want uncertainty over the legislation’s legality to linger.  Thus, in the Supreme Court, both sides are arguing that section 7421 does not bar the lawsuit.  The Court appointed Robert Long, an experienced Supreme Court practitioner, as an amicus curiae to brief and argue the position that section 7421 does bar the suit.

The oral argument on the morning of March 26 will proceed as follows:  Robert Long, arguing as amicus for 40 minutes that the challenges are barred; Solicitor General Donald Verrilli, arguing for the government for 30 minutes that section 7421 does not bar the challenges, and Gregory Katsas, arguing for the challengers for 20 minutes also that section 7421 does not bar the challenges.

The Court has annouced that a transcript and audio of the argument will be posted on its website by 2:00 that afternoon.  We will be back sometime after that with some observations on the argument.

The Supreme Court briefs filed on this issue can be found here.  The Court is likely to issue its decision during the last week of June.

Although both parties appealed, as the initial appellant DOJ began the argument.  DOJ counsel argued that the Supreme Court’s decision in Nat’l Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 982 (2005), allowed Treas. Reg. § 1.6662-5(d) to override the Fifth Circuit’s position in Heasley v. Commissioner, 902 F.2d 380 (5th Cir. 1990), that a valuation misstatement cannot apply where there are grounds for invalidating the transaction other than an incorrect valuation — such as where the transaction is totally disallowed under economic substance or on technical grounds.  In this regard, DOJ requested that the court submit the matter for en banc review to address this issue and to consider the impact of Weiner v. United States, 389 F.3d 152 (5th Cir. 2004), which counsel characterized (as DOJ had in the brief) as calling the “total disallowance” rule into question. 

As to the substantive application of penalties, DOJ argued that the complete concession by the taxpayer of the substance of the transaction compelled the conclusion that the position lacked substantial authority.  Furthermore, counsel argued that there was no substantial authority at the time the transaction was reported on the taxpayer’s return.  In this regard, DOJ posited that although Helmer v. Commissioner, 34 T.C.M. (CCH) 727 (1975), had held that a contingent liability was not a liability for purposes of section 752, it did not address the questions of buying and selling offsetting options and of contributing them to a partnership only to arrange for a distribution and sale.  As to these points, the only authority on point was Notice 2000-44, which stood for the proposition that the transaction did not work.  This appears to be a repackaged version of the argument that there can never be substantial authority for transactions lacking economic substance. 

Argument transitioned to the question of whether the district court had jurisdiction to consider a penalty defense put on by the partners and not by the partnership in this partnership action.  For a prior discussion of this confusing question see our analysis here.  Citing Klamath Strategic Inv. Fund, LLC v. United States, 568 F.3d 537 (5th Cir. 2009), DOJ counsel argued that the Fifth Circuit had already decided that an individual reasonable cause argument (such as one based on a legal opinion issued to the partner) cannot be raised in a TEFRA proceeding.  The court seemed to recognize the impact of Klamath on this point.  DOJ counsel then attempted to box the partnership in (as it had in the brief) on the question of whether the defense was raised by the partner or the partnership (several statements in the district court’s opinion seem to view the defense as a partner-level defense).  

Moving on to the question of the merits of the reasonable cause position, DOJ argued that the district court erred in considering reliance on the tax opinion (which was written by R.J. Ruble) to be reasonable.  Initially, counsel questioned whether the partners’ testimony that they did not believe Ruble had a conflict was reasonable in light of the partners’ knowledge of fee sharing and of the fact that Ruble had written opinions for other shelters for the same promoter.  The court seemed to be honed in on this question.  In closing, DOJ attempted to poison the well of partner good faith by reminding the Court that the partners in this case were repeat tax-shelter offenders and had attempted to hide the Son-of-BOSS losses as negative gross revenue from their law firm business. 

Perhaps indicating a weakness on the penalty issues raised by DOJ, taxpayer’s counsel spent most of his time on the question of whether the second FPAA was invalid.  The Court focused counsel on the fact that an error on the tax return (the Form 1065 did not check the TEFRA box although it did check the flow-through partner box (which would indicate a TEFRA partnership)) led the agent originally to pursue the case as non-TEFRA.  Undeterred, counsel argued that this error was not material and that the agent had indicated in a deposition that he eventually learned that the partnership was TEFRA.  Testimony was also offered in the district court that the reporting was an innocent mistake and not negligent or deceptive.  The Court spent significant time questioning why the agent did not testify at trial (which appears to have been due to a mix-up on the part of DOJ).  In summarizing his position, taxpayer’s counsel tried to focus the court on the language of the partnership no-change letter but to us it appears that the real question has to be whether the agent intended this to be a TEFRA audit.  An FPAA simply cannot come out of a non-TEFRA audit.  Based on the agent’s deposition transcript it seems clear that he did not believe he was involved in a TEFRA audit when he opened the audit and thus it is impossible that the initial notice was an FPAA. 

Rebutting DOJ’s reasonable cause position, taxpayer’s counsel focused on the trial testimony and factual determinations by the district court that the taxpayers were acting reasonably and in good faith.  On the question of jurisdiction, the taxpayer reverted to the tried and true (but not very strong) argument that requiring a later refund suit to address the reasonable cause question would be a waste of judicial resources and, in essence, a meaningless step.  A cynic might say that the purpose of TEFRA is to waste judicial resources and create meaningless steps. 

In rebuttal, DOJ counsel focused on the no-second-FPAA question and did a good job from our perspective.  He noted that you have to have a TEFRA proceeding to have a TEFRA notice.  Undermining the district court’s determination that the finality of the notice is relevant, counsel noted that all non-TEFRA notices are “final” but that doesn’t mean they are FPAAs.  TEFRA is a parallel audit procedure and it is simply not enough that the IRS intended a final determination in a non-TEFRA partnership audit.  The question is whether the IRS intended to issue a final notice in a TEFRA proceeding; since there was no “first” TEFRA proceeding, there was no “first” FPAA.  We think this argument is right on target. 

With limited questions coming from the Court it is difficult to see where this is headed.  Our best guess is that the partnership will prevail on the reasonable cause position (it is difficult for an appellate court to overturn credibility determinations of witnesses) but lose on everything else including the no-second-FPAA issue.

As we have previously reported, the Kawashima case involves the interplay between two subsections of the deportation statute’s definition of aggravated felonies, 8 U.S.C. § 1101(a)(43).  Subsection (M)(i) broadly includes offenses “involv[ing] fraud or deceit”; subsection (M)(ii) adds violations of Code section 7201 (tax evasion).  The Kawashimas argued that subsection (ii) is addressed to tax offenses and therefore the statute does not include the less serious tax offenses covered by section 7206.  The government argued that section 7206 offenses involve “fraud or deceit,” and therefore they are covered by subsection (ii).  (See here for a more detailed analysis of the Supreme Court briefing).

The majority agreed with the government, applying a literal and technical approach to the statutory language that did not afford much weight to the historical understanding of the criminal tax provisions.  The Court first found that the conduct of willfully submitting a false tax return inherently involves ‘deceit” and therefore is encompassed within subsection (i).  The Court then rejected the Kawashimas’ primary argument that this conclusion was untenable because it would make subsection (ii) entirely superfluous (since tax evasion also involves deceit).  To support that conclusion, the Court accepted the government’s technical argument that subsection (ii) was not superfluous because there was theoretically a situation where tax evasion does not involve “deceit” – namely, when a taxpayer files a truthful tax return but evades payment by moving his assets beyond the reach of the IRS.  Thus, the Court ruled that, “[a]lthough the Government concedes that evasion-of-payment cases will almost invariably involve some affirmative acts of fraud or deceit, it is still true that the elements of tax evasion pursuant to §7201 do not necessarily involve fraud or deceit.”

The dissenters characterized the majority’s construction of the statute as “dubious,” criticizing in particular its contortions to avoid the conclusion that its construction “effectively renders Clause (ii) superfluous.”  According to the dissent, the government’s proposed instances of tax evasion not involving “deceit” are not just “rare,” they are “imaginary.”  Given that the Court has previously “declined to interpret legislation in a way that ‘would in practical effect render [a provision] entirely superfluous in all but the most unusual circumstances,” the dissent argued that the majority’s reading is unsustainable.  Pointing to an amicus brief filed by former IRS Commissioner Johnnie Walters, the dissent also stated that the Court’s decision would have adverse consequences for the efficient handling of tax prosecutions.  In particular, it will discourage aliens from pleading guilty to the lesser section 7206 offense instead of going to trial on a tax evasion charge, because of the risk of deportation.

Kawashima Supreme Court opinion

The government has filed its reply brief in the Historic Boardwalk case in the Third Circuit.   (See our prior report and the other briefs here.)  The brief mostly goes over the same ground as the opening brief in seeking to deny section 47 historic rehabilitation credits to the private investor partner in the partnership that rehabilitated East Hall on the Atlantic City boardwalk.  It attempts to side-step the Ninth Circuit’s economic substance analysis in Sacks by arguing that the Third Circuit did not explicitly endorse Sacks when it distinguished that case in other decisions.  The brief urges the court instead to follow the Fourth Circuit’s Virginia Historic decision (see our coverage here), even though that case involved the disguised sale provisions, arguing that the case “touches on the same risk-reward analysis that lies at the heart of the bona-fide partner determination.”  The government also argues that Congress’s intent in passing section 47 would not be thwarted because the private investor allegedly “made no investment in the Hall.” 

Indeed, the reply brief includes a special “postscript” “in response to the amicus brief” filed for the National Trust for Historic Preservation that seeks to deflect the charge that the government’s position would undermine Congress’s purpose to facilitate historic rehabilitation.  Not so, says the government.  It is only “the prohibited sale of federal tax credits — not the rehabilitation tax credit provision itself — that is under attack here.”

Oral argument in the case has been tentatively scheduled for April 20.

Historic Boardwalk – Government’s Reply Brief

Home Concrete involves the scope of the extended six-year statute of limitations applicable when a taxpayer “omits from gross income an amount properly includible therein.”  The case presents two main issues:  (1) whether that statutory language covers overstatements of tax basis, even though the Supreme Court construed the same phrase in a predecessor statute not to do so; and, (2) if the Court does not accept the government’s statutory argument, whether it must defer to a recent Treasury regulation that adopts the government’s proffered interpretation.  The argument was lively, with all Justices save Justice Thomas asking questions at some point.  It was also somewhat disjointed, as the discussion jumped from topic to topic without any obvious agreement among the Justices concerning which issue would be the ground for resolving the case.

Arguing on behalf of the United States, Deputy Solicitor General Malcolm Stewart began by making a determined effort to persuade the Court that it should prevail on a standard statutory analysis without the need to resort to Chevron deference.  In response to questions from the Chief Justice and Justice Scalia suggesting that the Court’s decision in The Colony, Inc. v. Commissioner derails that argument from the start, Stewart argued that Colony did not purport to give a definitive definition of the “omits from gross income” language wherever it appears in the Code.  Rather, it just interpreted the language for the 1939 Code, and the 1954 Code should be read differently because of the additional subsections that were added.

Several Justices (the Chief Justice, Justice Scalia, and Justice Sotomayor) expressed skepticism that Congress would have used such an obscure mechanism to change the interpretation of the “omits from gross income” phrase.  Stewart responded that he would agree if Colony had been on the books when the 1954 Code was enacted.  But in fact Colony was not decided until 1958, and Congress was acting against the backdrop of the existing circuit conflict on the meaning of the 1939 Code.  Justices Kennedy and Scalia immediately questioned that response, stating that it is “very strange” to say that the same language would have a different meaning depending upon when Colony was decided.  Justice Scalia then elaborated on his skepticism over the government’s attempts to prevail on the statute alone, stating that “we’re not writing on a blank slate here.”  “I think Colony may well have been wrong, but there it is.  It’s the law.  And it said that that language meant a certain thing.”

At that point, Justice Kagan sought to rescue Stewart by interjecting that the government has two arguments and the second one – that Treasury had the power to reinterpret the statute in regulations – was independent of Colony’s interpretation of the statutory language.  Although Stewart first tried to steer the Court back to the statute, Justice Kagan persisted, and the Chief Justice then entered the fray to question the linchpin of the government’s deference argument – namely, that Colony had found the statute to be “ambiguous.”  The Chief Justice pointed out that Justice Harlan, in using that word in 1958, “was writing very much in a pre-Chevron world” and likely was using the word not as “a term of art,” but rather in an attempt to be gracious to the lawyers and courts that had taken the opposite position.  Justice Ginsburg, however, pointed out that the Court had characterized the new subsection in the 1954 Code as “unambiguous” and therefore should be taken at its word that the 1939 Code was ambiguous.

Another line of questioning explored the extent to which there was ever a well-entrenched view that Colony controlled the meaning of the 1954 Code.  Stewart rejected the taxpayer’s position that everyone understood Colony as controlling prior to the Son-of-BOSS litigation, stating that there was a “surprising dearth of law” on the point, but the only arguably relevant case was a 1968 Fifth Circuit decision that suggested that Colony was not controlling.  The taxpayer and the Fifth Circuit dispute that reading of the case.  (No one observed that the likely reason there was no case law on this issue was because the IRS accepted Colony as controlling and therefore never attempted to invoke the six-year statute for overstatements of basis.)  Justice Breyer asked about a 2000 IRS guidance document that appeared to adopt the taxpayer’s view of Colony, but government counsel dismissed it as merely the view of a single District Counsel.  That prompted the Chief Justice to ask acerbically “at what level of the IRS bureaucracy can you feel comfortable that the advice you are getting is correct?”

When Gregory Garre took the podium on behalf of the taxpayer, Justice Kagan asked why Congress had added the new subsection addressing a trade or business.  Garre argued that it was designed to resolve the Colony issue favorably to the taxpayer, noting that there was nothing problematic about the fact that the new subsection addressed the specific problem of cost of goods sold instead of explicitly sweeping more broadly.  That answer triggered a more extensive discussion of why Congress acted as it did and whether it was drawing a distinction between sales of goods and services (addressed in the new subsection) and sales of real estate (at issue in Colony).

The key administrative law precedent at issue on the deference argument is National Cable & Telecommunications. Ass’n v. Brand X Internet Services, in which the Court accorded deference to a regulation that overturned existing court of appeals precedent.  The Court did not show any interest in backing away from Brand X, but it did suggest that it might read the case somewhat more narrowly than the government would like.  In Brand X, Justice Stevens wrote a short concurring opinion stating that the holding would not apply to a Supreme Court opinion because at that point no ambiguity would be left.  At the beginning of the argument, Justice Scalia echoed that view when he objected to Stewart’s reliance on the statement in Colony that the statute was “not unambiguous” by observing:  “Yes, but once we resolve an ambiguity in the statute, that’s the law and the agency cannot issue a regulation that changes the law just because going in the language was ambiguous.”  The Chief Justice returned to this point at the argument’s close.  He asked the only questions during the government’s rebuttal argument, seeking to confirm that the Court has never applied Brand X to one of its own decisions – that is, that “we’ve never said an agency can change what we’ve said the law means.”

The more open-ended issue concerning the scope of Brand X is what exactly was meant in that case by the statement that the judicial construction can trump a later regulation “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.”  The Court’s exploration of this point began with a lighthearted comment by Justice Scalia that the question in the case boils down to whether indeed Colony meant “ambiguous” when it used that term.  Justice Alito followed up, however, pointing out that every statutory interpretation question in the Supreme Court “involve[s] some degree of ambiguity . . ., [s]o what degree of ambiguity is Brand X referring to?”

Garre’s response to this question was to go back to the original Chevron decision, which “looks to whether Congress has addressed the specific question presented.”  Under that approach, Colony should be regarded as having found the degree of clarity necessary to insulate it from being overturned by regulation, because the Court concluded that Congress had addressed this specific question.  Justice Kagan, later seconded by Justice Ginsburg, questioned that approach, commenting that the relevant question is “how clearly did Congress speak to that specific situation?”  Because the Colony Court stated that the text was ambiguous and had to do a lot of “tap dancing” through the legislative history to resolve the case, she stated that Colony must be read as indicating “a lot of ambiguity.”  Justice Breyer then jumped in to express agreement with the taxpayer’s argument that the Colony Court’s resort to legislative history was just a standard mode of statutory construction that did not require treating that case as finding an ambiguity under Brand X.  Instead, Justice Breyer stated, “[t]here are many different kinds of ambiguity and the question is, is this of the kind where the agency later would come and use its expertise”?

The argument devoted relatively little attention to the retroactivity question.  The Chief Justice observed that, in light of Brand X, a taxpayer could never feel confident about a tax precedent because the IRS can change the rule and apply it retroactively.  This observation, however, did not obviously elicit much concern from the other Justices, with the notable exception of Justice Breyer who had stated early on that it was “unfair” for the IRS to promulgate “a regulation which tries to reach back and capture people who filed their return nine years before.”  Later, Justice Breyer acknowledged that merely tagging the retroactivity as unfair “is not enough” and asked Garre an incredibly long question designed to explore possible justifications for avoiding the retroactive application of the regulations even if the Court were to defer to them on a prospective basis.  These ideas, however, did not appear to gain any traction with the other Justices.

Predicting the outcome on the basis of this oral argument is dicey.  Justice Kagan appeared sympathetic to the government’s position, while Justice Breyer was very troubled by the unfairness of it.  Justices Ginsburg and Sotomayor seemed to tilt towards the government.  But most of the Justices expressed enough difficulty with both sides that their votes cannot reasonably be forecast.  Overall, however, it did appear that the Court is more likely heading towards a relatively narrow decision than towards one that would break new ground in administrative law.  The Court’s approach to Colony will likely be critical.  If the Court treats Colony as precedential with respect to the 1954 Code, as it was generally regarded for fifty years, then it would not be difficult to rule for the taxpayer.  Brand X might be distinguished because Colony is a Supreme Court decision, or perhaps on the ground that the case should not be treated as finding an “ambiguity” in Chevron terms.  Conversely, if the Court views Colony as inapplicable to the 1954 Code, then, notwithstanding Justice Scalia’s observation to the contrary, the Court will essentially be writing on a blank slate.  If so, Brand X would likely lead to a ruling for the government.