Home Concrete Decided: Taxpayer Wins
On April 25, 2012 the Supreme Court ruled that the overstatement of the basis of property sold, resulting in a substantial understatement of gain, is not an omission from gross income, and so the three year and not the six year statute of limitations applied to the taxpayer’s assessment, meaning the assessment came too late. United States v. Home Concrete & Supply, LLP, 2012 U.S. LEXIS 3274, affirming, 634 F.3d 249 (4th Cir. 2011).
Stare Decisis. The plurality opinion of Justice Breyer relied squarely on Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), which appeared to have, and the Court ruled did, resolve the issue 54 years earlier.
The Court understood that the gross income item arising under section 61(a)(3), “gains derived from dealing in property,” is a net amount that can be reduced by an improper basis increase, pursuant to the rules of section 1001 defining gain. However, just as in Colony, the Court accorded greater significance to the statutory word “omits.” Citing a 1939 dictionary for the definition “leaves out,” the Court concluded, as had Colony, that a sale gain understatement that resulted from a basis overstatement did not leave out anything, including profit, and so Congress did not intend for the statute of limitations extension to apply in such a case. This was really the end of the operative analysis, but the three opinions go on for another 27 pages.
Chevron Deference. The real struggle of the case was not in defending the reasoning of Colony or the application of stare decisis, but rather was in determining the power of the Treasury to change Colony. The Treasury argued that Chevron deference should be accorded to a regulation it adopted in 2010 to reject Colony (and to be applicable retroactively to the Home Concrete audit). Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). It argued further that regulations could reject even a Supreme Court interpretation of a statute when the statute was ambiguous, citing National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967 (2005).
Brand X had indicated that rule based on the standard Chevron two prong analysis: (1) is the statute ambiguous, and if so (2) is the agency interpretation within a wide zone of plausibility.
The Court defused the Brand X argument by the straightforward expedient of stating that the statute was no longer ambiguous after the Supreme Court interpreted it. This required some explaining in light of the fact that Colony had stated the statute was ambiguous.
The explanation provided is that there is ambiguity subject to statutory interpretation to determine what the statute means, and then there are statutory gaps as to which the meaning cannot be determined by interpretation but can be created by the agency. In the former case the Court did not intend to give up its power as a court to determine what Congress meant.
When Colony stated in 1958 that the statute was ambiguous it was not speaking in light of the Chevron analysis created thirty years later and it was not saying that the correct meaning of the statute was unknowable without agency regulations. Using modern terminology, there is no gap in the statute and Colony did not say otherwise. Courts can determine not just the best meaning, but the proper meaning. When that occurs, there is no room for agency interpretation to the contrary; or at least this is the view of the plurality.
Concurrence and Dissent. There are two caveats to the eminently reasonable analysis in Justice Breyer’s opinion. First, he stated that judges today might use other methods to determine whether Congress has left a gap to fill, but Colony’s determination that a facially ambiguous statute can be made unambiguous by statutory interpretation must be honored under stare decisis. Second, four Justices dissented and Justice Scalia, who concurred in the judgment and in part of the opinion, purported not to join Justice Breyer’s explanation of gap filling.
Actually Justice Scalia personally appears to agree with Justice Breyer’s opinion that once a court says what a statute means that is unambiguously what it means; Justice Scalia so stated in dissent in Brand X. However, as is often the case when a Justice comes to apply a majority decision (Brand X) to which he dissented, he doubles down on the majority view. The majority view in Brand X is said to be that garden variety facial ambiguity permits administrative interpretation that conflicts with a court’s interpretation so long as the agency interpretation is not unreasonable.
In other words, Justice Scalia will have none of the nuanced understanding of gap filling discussed in the plurality opinion. He believes that if the statute walks and talks like an ambiguous statute, then there is a gap and the agency may fill that gap, regardless of a court being able to say that Congress intended one interpretation.
Perhaps the peevishness of losing in Brand X motivated Justice Scalia, but what motivates the “liberal” wing of the Court (plus Justice Kennedy, minus Justice Breyer) to dissent? The dissent first frees the case from the control of Colony by reliance on certain ancillary statutory changes occurring after the years at issue in Colony, which Justice Breyer found “too fragile” to unseat Colony (like “hoping that a new batboy will change the outcome of the World Series, …” slip op. 7). Technically this step of analysis removed the case from reliance on the Brand X implication that an agency can reject a prior court interpretation (because the statute changed). Therefore, all the dissent said was that the Treasury was free to interpret the ambiguous statute free of any contrary indication in Colony because Colony did not control because the statute had changed.
Reading the Tea Leaves. Finally the dissent tipped its hand in what Justice Scalia called a peroration by stating its faith in an iterative process involving the interplay of all of Congress, the courts and the agencies. In contrast Justice Scalia asserted the traditional role of the courts to say what Congress meant and Justice Breyer in effect did the same. In other words for practical purposes the conservative bloc on the Court can be seen to come down on the side of judicial and congressional power against agency power (contrary to the original Chevron result); while the liberal bloc (except for Justice Breyer) can be seen to come down on the side of agency power.
Another way to look at the split is that the plurality plus Justice Scalia rejected a highly nuanced analysis of the difference between the old statute and the current statute, while the plurality adopted a more nuanced interpretation of the meaning of the Chevron-Brand X test, much to the distress of Justice Scalia, who indicated that the whole mode of analysis of statutes had gone too far. Justice Breyer and the three Justices (Roberts, Alito and Thomas) who joined his opinion, would add another layer to the Chevron-Brand X test, looking to the reason for the rule that an agency interpretation could trump a prior court interpretation: the statute contained an inherent gap that had to be filled somehow by a court (which cannot avoid deciding a case), but could be filled otherwise by the agency. But when the statute did not contain an inherently unknowable term it could be interpreted once and for all by a court.
Thus, to perhaps overemphasize the point of the plurality opinion, a statutory ambiguity may or may not be a gap that an agency has broad discretion to fill, depending on the certainty with which a court (or any other objective actor for that matter) can say what Congress meant. If the court can say this is what Congress meant then the statute is not ultimately ambiguous, although it may appear ambiguous on its face.
The problem with this approach is that it creates a cliff effect for statutory interpretation. If the interpretation is clear enough then there is no gap; but if the interpretation is more along the lines of a better choice among several choices of meaning, then the statute may be ambiguous. The dissent likely intuitively resisted the very ambiguity of this test. However, as both the plurality and Justice Scalia point out, the dissent’s approach throws out the baby with the bathwater: it denies to any court, much less the Supreme Court, the ultimate power to say what the law is.
Conclusion. Justice Breyer quoted and italicized the words of Chevron that “if a court, employing traditional tools of statutory construction, ascertains that Congress had an intention,” then that is the meaning of the statute. This must be the correct analysis if courts are to retain control of their principal line of work: interpreting statutes. It would have been the majority view if Justice Scalia did not have such an idiosynchratic view of statutory interpretation.