Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-10-01204/USCOURTS-caDC-10-01204-1/pdf.json

Parties Involved:
Bausch & Lomb Incorporated
Amicus Curiae for Appellee
Commissioner of Internal Revenue Service
Appellant
Thomas A. Davies
Appellee
Intermountain Insurance Service of Vail, Limited Liability Company
Appellee

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 5, 2011 Decided June 21, 2011 

 Reissued August 18, 2011 

No. 10-1204 

INTERMOUNTAIN INSURANCE SERVICE OF VAIL, LIMITED 

LIABILITY COMPANY AND THOMAS A. DAVIES, TAX MATTERS 

PARTNER, 

APPELLEES

v. 

COMMISSIONER OF INTERNAL REVENUE SERVICE, 

APPELLANT

Appeal from the United States Tax Court 

Gilbert S. Rothenberg, Acting Deputy Assistant Attorney 

General, U.S. Department of Justice, argued the cause for 

appellant. With him on the briefs were Michael J. Haungs and 

Joan I. Oppenheimer, Attorneys. 

Brian F. Huebsch argued the cause for appellees. With 

him on the brief was Steven R. Anderson. 

Roger J. Jones, Andrew R. Roberson, and Kim Marie 

Boylan were on the brief for amicus curiae Bausch & Lomb 

Incorporated in support of appellees. 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 1 of 34
2 

Before: SENTELLE, Chief Judge, TATEL, Circuit Judge, 

and RANDOLPH, Senior Circuit Judge. 

Opinion for the court filed by Circuit Judge TATEL. 

 TATEL, Circuit Judge: The Commissioner of Internal 

Revenue and Intermountain Insurance Service of Vail 

disagree about Intermountain’s 1999 gross income to the tune 

of approximately $2 million, a disagreement arising from 

Intermountain’s sale of assets and centering primarily on the 

Commissioner’s conclusion that Intermountain inflated its 

basis in those assets. But deciding whether Intermountain 

inflated its basis must wait for another day because we must 

first answer an antecedent question: did the Commissioner 

wait too long to adjust Intermountain’s gross income? 

Although the Commissioner usually must make such an 

adjustment within three years, sections 6501(e)(1)(A) and 

6229(c)(2) of the Internal Revenue Code give the 

Commissioner up to six years if the taxpayer (or partnership) 

“omits from gross income an amount properly includible 

therein which is in excess of 25 percent of the amount of 

gross income stated in the return.” (emphasis added). Because 

in this case the Commissioner waited nearly six years after 

Intermountain filed its 1999 tax return, the adjustment was 

timely only if a basis overstatement can result in an “omission 

from gross income” for purposes of these two provisions. Id.

Believing it does not, the Tax Court granted summary 

judgment to Intermountain. For the reasons set forth in this 

opinion, we reverse. 

I. 

 The key tax concept at issue in this case is “basis.” Basis 

refers to a taxpayer’s capital stake in an item of property—

generally the amount the taxpayer paid to obtain it, as 

adjusted by various other factors. 26 U.S.C. § 1012. When a 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 2 of 34
3 

taxpayer sells property, he realizes gain from that sale, and 

that gain contributes to gross income. Id. § 61(a)(3). But the 

taxpayer’s gain from the property sale is not the sale price (or 

in technical terms, the “amount realized”) but rather the sale 

price minus basis. Id. § 1001. Given the role basis plays in 

calculating gross income, a higher basis translates into a lower 

gross income. In the real world, of course, people generally 

prefer a higher gross income. But when dealing with the tax 

collector, lower gross income means a smaller tax bill. 

Taxpayers, therefore, prefer a higher basis. 

 The question this case presents is whether a taxpayer who 

overstates basis in sold property and therefore understates 

gross income triggers the extended statute of limitations 

periods. (For the sake of brevity, we will sometimes refer to 

the issue as whether a basis overstatement constitutes an 

omission from gross income under the relevant provisions.) 

This issue “arises in the context of the now infamous Son of 

BOSS tax shelter,” which shields income from taxation by 

artificially inflating basis. Appellant’s Br. 4 (internal 

quotation marks and citations omitted). As amicus Bausch & 

Lomb accurately observes, however, our resolution of this 

case will “apply equally to all taxpayers . . . without regard to 

the nature of the underlying transaction.” Amicus’s Br. 7; see 

also Wilmington Partners v. Comm’r, No. 10-4183 (2d Cir. 

filed Oct. 13, 2010). Conscious of that, and because we agree 

with the Tax Court that “[t]he details of the transactions are 

largely irrelevant to the issues we face today,” we shall refer 

to those details only to the extent necessary to explain our 

disposition of this case. Intermountain Ins. Serv. of Vail, 

L.L.C. v. Comm’r, 134 T.C. 211, 212 (2010) (“Intermountain 

II”). 

 The Commissioner accuses Intermountain Insurance 

Service of Vail of using a Son of BOSS tax shelter to avoid 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 3 of 34
4 

taxes on approximately $2 million of income. Intermountain 

realized that income on August 1, 1999 when it sold its assets 

for $1,918,844. On its 1999 Tax Return, filed on September 

15, 2000, Intermountain reported a loss from this sale of 

$11,420, an amount it calculated by subtracting its purported 

basis in the sold assets ($2,061,808) from the sale proceeds 

($1,918,844) and the recaptured depreciation ($131,544). 

Believing Intermountain had artificially inflated its basis in 

those assets, thus converting a substantial gain into a loss, the 

IRS mailed Intermountain a Final Partnership Administrative 

Adjustment (abbreviated FPAA and pronounced “F-Paw” in 

tax-speak) on September 14, 2006, nearly six years after 

Intermountain had filed its 1999 Tax Return. The FPAA 

concluded that certain Intermountain transactions “were a 

sham, lacked economic substance and . . . had a principal 

purpose of . . . [reducing] substantially the present value of 

. . . [Intermountain’s] partners’ aggregate federal tax 

liability.” Id. at 4 (quoting the FPAA) (alterations in the 

original). As a result, the FPAA adjusted Intermountain’s 

basis to $0. 

 Intermountain petitioned the Tax Court and moved for 

summary judgment, arguing that the FPAA was untimely 

because the IRS mailed it after the expiration of the standard 

three year statute of limitations provided for in 26 U.S.C. 

§§ 6501(a) and 6229(a) (2000). Insisting that the FPAA was 

in fact timely, the Commissioner contended that 

Intermountain’s return triggered the extended six year 

limitations period, available in the case of any taxpayer, 26 

U.S.C. § 6501(e)(1)(A) (2000), or any partnership, 26 U.S.C. 

§ 6229(c)(2) (2000), who “omits from gross income an 

amount properly includible therein which is in excess of 25 

percent of the amount of gross income stated in the return.” 

(emphasis added). The alleged omissions to which the 

Commissioner pointed were almost all overstatements of 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 4 of 34
5 

basis. The key question for the Tax Court, then, was whether 

such overstatements qualify as omissions from gross income 

under sections 6501(e)(1)(A) and 6229(c)(2) and thus trigger 

the six year limitations period. Contending they do not, 

Intermountain relied on an earlier tax court decision, 

Bakersfield Energy Partners v. Commissioner, 128 T.C. 207 

(2007), aff’d, 568 F.3d 767 (9th Cir. 2009), which had applied 

the Supreme Court’s decision in Colony, Inc. v. 

Commissioner, 357 U.S. 28 (1958). In Colony, the meaning of 

which is central to this case, the Supreme Court interpreted 

“omits from gross income” in section 6501(e)(1)(A)’s 

predecessor to exclude basis overstatements. Id. The Tax 

Court agreed with Intermountain that Colony applies to 

sections 6501(e)(1)(A) and 6229(c)(2) and that basis 

overstatements are not “omissions from gross income.” 

Intermountain Ins. Serv. of Vail, L.L.C.. v. Comm’r, 98 

T.C.M. (CCH) 144, 2009 WL 2762360 (2009) 

(“Intermountain I”). Accordingly, the court granted 

Intermountain summary judgment. Id. 

Shortly after the Tax Court’s grant of summary 

judgment—and implicitly contradicting that decision—the 

Internal Revenue Service issued temporary regulations that 

interpret the phrase “omits from gross income” in sections 

6501(e)(1)(A) and 6229(c)(2) to include basis overstatements 

outside the trade or business context. 26 C.F.R. 

§§ 301.6501(e)-1T; 301.6229(c)(2)-1T (2010). The Service 

reasoned that because I.R.C. section 61(a)’s standard 

definition of “gross income” includes “gains derived from 

dealings in property,” 26 U.S.C. § 61(a)(3), and because such 

gains are ordinarily calculated by subtracting basis from the 

amount realized, id. § 1001, “outside the context of a trade or 

business, any basis overstatement that leads to an 

understatement of gross income under section 61(a) 

constitutes an omission from gross income for purposes of 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 5 of 34
6 

sections 6501(e)(1)(A) and 6229(c)(2).” Definition of 

Omission from Gross Income, T.D. 9466, 74 Fed. Reg. 

49,321, 49,321 (Sept. 28, 2009). As for Colony, the Service 

concluded that it applies only to section 6501(e)(1)(A)’s 

predecessor, pointing out that Congress had enacted section 

6501(e)(1)(A) four years before the Supreme Court decided 

Colony and had, at that time, added an amendment (limited to 

the trade or business context) designed to address the very 

same issue later addressed in Colony. Id. Relying on those 

temporary regulations, the Commissioner moved the Tax 

Court for reconsideration and to vacate its grant of summary 

judgment. Denying that motion, the Tax Court found the 

temporary regulations inapplicable to Intermountain because 

the standard three year statute of limitations had expired prior 

to September 24, 2009, the temporary regulations’ 

applicability date. Intermountain II, 134 T.C. at 218–20. The 

Tax Court went on to hold that even assuming the regulations 

applied, because Colony “ ‘unambiguously forecloses the 

agency’s interpretation’ of sections 6229(c)(2) and 

6501(e)(1)(A),” that decision “displaces [the Commissioner’s] 

temporary regulations.” Id. at 224 (quoting Nat’l Cable & 

Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 

983 (2005)). For exactly the same reasons, the Tax Court also 

granted summary judgment to another petitioner, UTAM. 

UTAM, Ltd. v. Comm’r, 98 T.C.M. (CCH) 422, 2009 WL 

3739456 (2009). 

 The Commissioner has appealed the Tax Court decisions 

in both cases, and because they raise many of the same issues, 

we scheduled oral argument for both on the same day before 

the same panel. Although formally resolving only 

Intermountain’s case here, we also address UTAM’s 

arguments about whether a basis overstatement constitutes an 

omission from gross income. In a separate opinion also 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 6 of 34
7 

released today, we address issues unique to that case. UTAM, 

Ltd. v. Comm’r, No. 10-1262, (D.C. Cir. June 21, 2011). 

II. 

 Determining whether basis overstatements constitute 

omissions from gross income and thus trigger the extended 

statute of limitations has long provoked debate, the history of 

which is critical to understanding this case. Congress first 

established the applicable extended statute of limitations in 

1934 when it added section 275(c) to the tax code. See

Revenue Act of 1934, ch. 277, 48 Stat. 680, 745, § 275(c) 

(codified at 26 U.S.C. § 275(c) (1934)). Section 275(c) 

lengthened the standard three year period, 26 U.S.C. § 275(a) 

(1934), to five years for omissions from gross income, 

providing as follows: 

Omission from gross income 

If the taxpayer omits from gross income an 

amount properly includible therein which is in 

excess of 25 per centum of the amount of gross 

income stated in the return, the tax may be 

assessed, or a proceeding in court for the 

collection of such tax may be begun without 

assessment, at any time within 5 years after the 

return was filed. 

Id. 

 In the 1940s and 1950s, the courts of appeals divided 

over how to interpret section 275(c). The Sixth Circuit held 

that a basis overstatement qualifies as an omission from gross 

income, thus triggering the extended period. See, e.g., Reis v. 

Comm’r, 142 F.2d 900, 902–03 (6th Cir. 1944). The Tax 

Court interpreted “omits from gross income” similarly. See, 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 7 of 34
8 

e.g., Estate of Gibbs v. Comm’r, 21 T.C. 443 (1954); Am. 

Liberty Oil Co. v. Comm’r, 1 T.C. 386 (1942). But the Third 

Circuit reached the opposite conclusion in Uptegrove Lumber 

Co. v. Commissioner, 204 F.2d 570 (3d Cir. 1953). The 

taxpayer in that case, a manufacturing corporation, had 

accurately reported gross sales, but had then mistakenly 

calculated profits by subtracting from the gross sales figure an 

inflated amount for the cost of goods sold. Uptegrove Lumber 

Co., 204 F.2d at 571. Although recognizing “real ambiguity” 

in the statute, the Third Circuit nonetheless concluded based 

on section 275(c)’s legislative history that a taxpayer omits an 

amount from gross income only when the taxpayer fails to 

report an item of gross sales, not when the taxpayer overstates 

the cost of that item and thus understates gross income. Id. at 

571–73. 

 One year after Uptegrove Lumber, in 1954, Congress, 

apparently responding to the circuit split, added two new 

subsections to section 275(c) as part of a major recodification 

of the 1939 tax code. Internal Revenue Code of 1954, 68 Stat. 

730, Pub. L. 83-591 (Aug. 16, 1954). In doing so, Congress 

also renumbered section 275 as section 6501. Id. The 

amended text (as relevant to this case) reads: 

Omission from gross income. . . . 

If the taxpayer omits from gross income an 

amount properly includible therein which is in 

excess of 25 percent of the amount of gross 

income stated in the return, the tax may be 

assessed, or a proceeding in court for the 

collection of such tax may be begun without 

assessment, at any time within 6 years after the 

return was filed. For the purposes of this 

subparagraph— 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 8 of 34
9 

 (i) In the case of a trade or business, 

the term “gross income” means the 

total of the amounts received or 

accrued from the sale of goods or 

services (if such amounts are 

required to be shown on the return) 

prior to diminution by the cost of 

such sales or services; and 

(ii) In determining the amount omitted 

from gross income, there shall not 

be taken into account any amount 

which is omitted from gross 

income stated in the return if such 

amount is disclosed in the return, 

or in a statement attached to the 

return, in a manner adequate to 

apprise the Secretary of the nature 

and amount of such item. 

26 U.S.C. § 6501(e)(1)(A) (1954). Notably, new 

subsection (i) substantially tracks Uptegrove Lumber’s 

holding by excluding basis overstatements from the category 

of omissions from gross income. The amendment, however, 

used a different mechanism to achieve that result. The Third 

Circuit had interpreted the phrase “omits from gross income” 

to exclude basis overstatements, but Congress literally took 

basis out of section 6501(e)(1)(A)’s equation, redefining 

“gross income” to mean gross receipts rather than gross 

receipts minus the cost of goods sold. One other difference is 

particularly important. Although Uptegrove Lumber involved 

a manufacturing corporation, its reasoning is not limited to 

that context. By contrast, and of critical significance to this 

case, subsection (i) applies only “[i]n the case of a trade or 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 9 of 34
10 

business.” Finally, section 6501(e)(1)(A) lengthened the 

extended statute of limitations from five to six years. 

In a letter to the Senate Finance Committee, attorneys 

supporting the Third Circuit’s approach stated their “belie[f] 

that sub[section] (i) . . . w[as] proposed to reflect the rule of 

reason announced by cases like Uptegrove Lumber Company

v. Commissioner.” An Act to Revise the Internal Revenue 

Laws of the United States: Hearing on H.R. 8300 Before the 

S. Comm. on Finance, 83d Cong. 984–85 (1954) (letter from 

Harry N. Wyatt, D’Ancona, Pflaum, Wyatt & Riskind) (added 

to the hearing record at the direction of the Committee 

Chairman, id. at 961) (“Wyatt Letter”). Worried that the new 

provisions would not apply to open tax years governed by the 

pre-1954 tax code, they asked the Committee to make the new 

subsections retroactive and to indicate that the amendments 

merely clarified section 275(c). Id. But to no avail—the 

House and Senate Reports characterized subsections (i) 

and (ii) as “changes from existing law,” and Congress 

nowhere indicated that section 6501(e)(1)(A) would apply 

retroactively. H.R. Rep. No. 83-1337, at 503 (1954), reprinted 

in 1954 U.S.C.C.A.N. 4017, 4562; S. Rep. No. 83-1622, at 

558 (1954), reprinted in 1954 U.S.C.C.A.N. 4621, 5233. 

 Left unresolved, therefore, was which interpretation—the 

Third Circuit’s or the Sixth Circuit and the Tax Court’s—

applied to section 275(c) of the 1939 Code. Over the next 

several years, other circuits embraced the Third Circuit’s 

approach, but the Sixth Circuit stuck with its earlier rule. 

Compare, e.g., Davis v. Hightower, 230 F.2d 549 (5th Cir. 

1956) (an overstatement of basis is not an omission from 

gross income), with Colony, Inc. v. Comm’r, 244 F.2d 75 (6th 

Cir. 1957) (an overstatement of basis is an omission from 

gross income), rev’d, 357 U.S. 28 (1958). In light of this 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 10 of 34
11 

continued circuit split, the Supreme Court granted certiorari in 

Colony. 

 Starting with section 275(c)’s text, the Supreme Court 

explained that “[a]lthough we are inclined to think that the 

statute on its face lends itself more plausibly to the taxpayer’s 

interpretation”—i.e., that basis overstatements are not 

omissions from gross income—“it cannot be said that the 

language is unambiguous.” Colony, Inc., 357 U.S. at 33. The 

Court therefore looked to section 275(c)’s legislative history, 

where it found “persuasive evidence” that Congress, when 

adding section 275(c) in 1934, never intended it to apply to 

basis overstatements. Id. Relying on these textual and 

legislative sources, the Court reasoned that “in enacting 

s[ection] 275(c) Congress manifested no broader purpose than 

to give the Commissioner an additional two years to 

investigate tax returns in cases where . . . the Commissioner is 

at a special disadvantage in detecting errors [because] the 

return on its face provides no clue to the existence of the 

omitted item.” Id. at 36. Believing that “the Commissioner is 

at no such disadvantage” when a taxpayer fully reports gross 

receipts but inflates the costs associated with those receipts, 

the Court concluded that basis overstatements fell beyond 

section 275(c)’s scope. Id. at 36–37. Finally, the Court 

buttressed its construction of section 275(c) by comparing it 

to newly enacted section 6501(e)(1)(A) in the 1954 Code. 

“[W]ithout doing more than noting the speculative debate 

between the parties as to whether Congress [in 1954] 

manifested an intention to clarify” section 275(c)’s meaning, 

as the taxpayer had argued, “or to change” that meaning, as 

the Commissioner had argued, the Court observed: “the 

conclusion we reach is in harmony with the unambiguous 

language of § 6501(e)(1)(A) of the Internal Revenue Code of 

1954.” Id. at 37. 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 11 of 34
12 

Colony thus closed the first round in the debate over 

whether a basis overstatement counts as an omission from 

gross income, that question having been “resolved for the 

future” (at least in the trade or business context) by Congress 

when it enacted section 6501(e)(1)(A) and “for earlier taxable 

years” (seemingly for all taxpayers) by Colony itself. Id. at 

32. Between 1954 and 2010, Congress reenacted section 

6501(e)(1)(A) repeatedly and without change. See, e.g., Tax 

Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085 

(1986). In addition, as part of the Tax Equity and Fiscal 

Responsibility Act of 1982, Congress added section 

6229(c)(2) to create an extended statute of limitations period 

for omissions from gross income appearing (or rather, not 

appearing) on partnership returns. Pub. L. No. 97-248, § 402, 

96 Stat. 324, 659 (1982). That new section tracks section 

6501(e)(1)(A)’s language but without subsections (i) or (ii): 

Substantial omission of income.—If any 

partnership omits from gross income an 

amount properly includible therein which is in 

excess of 25 percent of the amount of gross 

income stated in its return, subsection (a) shall 

be applied by substituting ‘6 years’ for ‘3 

years’. 

 

26 U.S.C. § 6229(c)(2) (1982). At oral argument, 

Intermountain argued that “this case is not about [section] 

6501” but only section 6229 given the Tax Court’s 

observation that where, as here, the Commissioner has 

adjusted only partnership items, only section 6229(c)(2) 

applies. Oral Arg. Tr. 15:13B16:01; see Intermountain II, 134 

T.C. at 212 n.2. Whether only section 6229(c)(2) applies here, 

however, is irrelevant, for Intermountain has consistently, 

both in the Tax Court and on appeal, treated both statutes as 

having the same meaning outside the trade or business context 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 12 of 34
13 

and has focused all but one of its arguments on both statutes 

together or on section 6501(e)(1)(A) alone. See id. (explaining 

that because “the parties [i.e., including Intermountain] refer 

to the temporary regulations [interpreting sections 

6501(e)(1)(A) and 6229(c)(2)] in tandem . . . we will follow 

the parties’ lead and refer to the temporary regulations in 

tandem”). That is, Intermountain’s arguments largely assume 

that the path to interpreting section 6229(c)(2) passes through 

section 6501(e)(1)(A). Accordingly, although we shall 

address Intermountain’s sole section 6229(c)(2)-specific 

argument in due course, see infra 24, we treat as forfeited any 

argument that the two sections might have different meanings 

outside the trade or business context, focusing our analysis, as 

have the parties themselves, on the earlier enacted section 

6501(e)(1)(A). See Potter v. District of Columbia, 558 F.3d 

542, 550 (D.C. Cir. 2009) (argument raised for the first time 

on appeal is forfeited); Ark Las Vegas Rest. Corp. v. NLRB, 

334 F.3d 99, 108 n.4 (D.C. Cir. 2003) (argument raised for 

the first time at oral argument is forfeited). 

All of this brings us nearly to the present. The latest 

round in the debate over whether a basis overstatement 

constitutes an omission from gross income has arisen in the 

last several years, largely in the context of entities, such as 

Intermountain, that the Commissioner believes took 

advantage of Son of BOSS tax shelters. See, e.g., Bakersfield 

Energy Partners v. Comm’r, 568 F.3d 767 (9th Cir. 2009), 

aff’g 128 T.C. 207 (2007); Salman Ranch Ltd. v. United 

States, 573 F.3d 1362 (Fed. Cir. 2009) (“Salman Ranch I”). 

But see Wilmington Partners v. Comm’r, No. 10-4183 (case 

involving whether basis overstatement triggers extended 

limitations period but no Son of Boss tax shelter allegation). 

Because all agree that subsection (i)’s redefinition of gross 

income unequivocally answers this question “in the case of a 

trade or business,” this debate centers entirely on entities, 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 13 of 34
14 

such as Intermountain (and UTAM), who operate outside that 

context. 

In several such cases, including this one, the Tax Court 

concluded that Colony controls this latest debate. See 

Intermountain I, 98 T.C.M. (CCH) 144; see also Bakersfield, 

128 T.C. 207. Although some district courts had held 

otherwise, by the time the Tax Court granted Intermountain’s 

motion for summary judgment, the Ninth and Federal Circuits 

had agreed with it. Compare Burks v. United States, No. 3:06-

cv-1747-N, 2009 WL 2600358 (N.D. Tex. June 13, 2008) 

(basis overstatement is an omission from gross income), 

rev’d, 633 F.3d 347 (5th Cir. 2011), and Home Concrete & 

Supply, L.L.C. v. United States, 599 F. Supp. 2d 678 

(E.D.N.C. 2008) (same), rev’d, 634 F.3d 249 (4th Cir. 2011), 

with Salman Ranch I, 573 F.3d 1362 (basis overstatement is 

not an omission from gross income), and Bakersfield, 568 

F.3d 767 (9th Cir. 2009) (same). 

Disagreeing with those circuits, the Commissioner issued 

the temporary regulations, described supra at 5–6, that 

interpreted sections 6501(e)(1)(A) and 6229(c)(2) to mean 

that outside the trade or business context an overstatement of 

basis constitutes an omission from gross income, thus 

triggering the extended six year statute of limitations. 

Simultaneously, the Commissioner issued proposed final 

regulations identical to the temporary regulations. Notice of 

Proposed Rulemaking, Definition of Omission from Gross 

Income, 74 Fed. Reg. 49,354 (Sept. 28, 2009). Approximately 

a year later, and after soliciting comments, the Commissioner 

withdrew the temporary regulations and replaced them with 

largely identical final regulations. See 26 C.F.R. 

§§ 301.6501(e)-1; 301.6229(c)(2)-1; see also Definition of 

Omission from Gross Income, T.D. 9511, 75 Fed. Reg. 

78,897 (Dec. 17, 2010). The Commissioner now contends that 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 14 of 34
15 

these regulations are entitled to Chevron deference and so 

control the question in this case. 

 Since the Commissioner issued the final regulations, 

several of our sister circuits have weighed in on the basis 

overstatement debate. The Fourth and Fifth Circuits have now 

joined the Ninth and Federal Circuits in holding that Colony’s 

interpretation of section 275(c) applies to sections 

6501(e)(1)(A) and 6229(c)(2). See Home Concrete & Supply, 

L.L.C. v. United States, 634 F.3d 249, 255 (4th Cir. 2011); 

Burks v. United States, 633 F.3d 347, 352–59 (5th Cir. 2011). 

The Fourth and Fifth Circuits also rejected the 

Commissioner’s reliance on the final regulations. Home 

Concrete & Supply, 634 F.3d at 255–58; Burks, 633 F.3d at 

359–61. By contrast, the Seventh Circuit concluded that 

Colony does not control and that the Commissioner’s 

interpretation of sections 6501(e)(1)(A) and 6229(c)(2) so 

aligns with Congress’s clear intent that the Commissioner had 

no need even to rely on the regulations. Beard v. Comm’r, 633 

F.3d 616 (7th Cir. 2011). Finally, the Federal Circuit, which 

had previously found Colony controlling in the absence of 

IRS regulations, held that because that decision provides only 

the best, but not the exclusive, construction of the phrase 

“omits from gross income,” the regulations displaced Colony. 

See Grapevine Imps., Ltd. v. United States, 636 F.3d 1368 

(Fed. Cir. 2011) (applying Brand X, 545 U.S. 967); see also 

Salman Ranch, Ltd. v. Comm’r, __ F.3d __, 2011 WL 

2120044 (10th Cir. 2011) (“Salman Ranch II”) (same). In 

considering this case, we have taken due account of our sister 

circuits’ analyses. 

 In addition, in 2010 Congress amended sections 

6501(e)(1)(A) and 6229(c)(2). See Hiring Incentives to 

Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71, 

112. In this opinion, we interpret the version of those sections 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 15 of 34
16 

applicable to 1999, the tax year at issue in this case. See 26 

U.S.C. §§ 6501(e)(1)(A), 6229(c)(2) (2000). 

III. 

As the Supreme Court just recently made clear, courts 

assessing Treasury regulations that interpret the tax code, as 

we do here, must apply the two-step framework of Chevron, 

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 

842–43 (1984). See Mayo Found. for Med. Educ. & Research 

v. United States, __ U.S. __, 131 S. Ct. 704, 713–14 (2011). 

Employing “traditional tools of statutory construction,” 

Chevron, 467 U.S. at 843 n.9, we begin our Chevron analysis 

by “determin[ing] whether Congress has unambiguously 

foreclosed the agency’s statutory interpretation.” Vill. of 

Barrington v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C. 

Cir. 2011) (internal quotation marks omitted). If it has not, 

then at Chevron’s second step, we “ask[] whether the 

[Commissioner’s] rule is a ‘reasonable interpretation’ of the 

enacted text.” Mayo Found., 131 S. Ct. at 714 (quoting 

Chevron, 467 U.S. at 844). 

Although we ordinarily begin a Chevron step one inquiry 

with the statute’s text, given the peculiar circumstances of this 

case, we must first assess Colony’s relevance to the question 

presented. Indeed, Intermountain’s argument largely “starts 

and ends” with Colony. Oral Arg. Tr. 15:07–15:08. Because 

“[a]t new [section] 6501(e)(1)(A) Congress adopted the exact 

same language the Supreme Court interpreted in Colony,” 

Intermountain claims we need do nothing more than apply 

Colony’s holding to this case. Appellees’ Br. 39. 

Intermountain is, of course, correct that in 1954 Congress 

transferred essentially all of section 275(c)’s text into section 

6501(e)(1)(A), and then added two new subsections. Had the 

meaning of the transferred text been well-established—either 

because the text itself was unambiguous or because, although 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 16 of 34
17 

it was ambiguous, the courts and Treasury had consistently 

interpreted it—then we would agree with Intermountain that 

this case is easy. We would simply assume Congress intended 

the text to convey that established pre-reenactment meaning. 

See Davis v. United States, 495 U.S. 472, 482 (1990) (noting 

that “Congress’ reenactment of the statute . . ., using the same 

language, indicates its apparent satisfaction with the 

prevailing interpretation of the statute” where the prevailing 

interpretation had first been offered by the Commissioner of 

Internal Revenue and then been consistently “relied on” by 

the courts). 

But we face a far different set of circumstances because 

the language Congress borrowed from section 275(c) was not 

only understood to be ambiguous, see, e.g., Uptegrove 

Lumber, 204 F.2d at 571 (noting “real ambiguity” in section 

275(c)’s text), but had been interpreted one way by the Sixth 

Circuit and another by the Third. Compare Reis, 142 F.2d at 

902–03, with Uptegrove Lumber, 204 F.2d at 571. Moreover, 

clearly aware of that debate, Congress added subsection (i) to 

section 6501(e)(1)(A) to resolve it. See supra at 8–10; see 

also Colony, 357 U.S. at 32 (noting that the basis 

overstatement debate had been “resolved for the future by 

[section] 6501(e)(1)(A)”); Pet’r’s Reply Br. 8, Colony, Inc., 

357 U.S. 28 (1958) (No. 306), 1958 WL 91877 (explaining 

that subsection (i) will “prevent future controversies as to the 

applicability of the extended limitation period in ‘cost of 

goods sold’ cases”); Wyatt Letter at 984–85 (expressing the 

“belie[f] that sub[section] (i) . . . w[as] proposed to reflect the 

rule of reason announced by cases like Uptegrove Lumber 

Company v. Commissioner”). As the Seventh Circuit aptly 

observed, “Congress, when revising [the provision at issue 

here], was responding not to a unifying decision such as 

Colony, but rather to the confusion throughout the circuits.” 

Beard, 633 F.3d at 622. Under these circumstances, we 

cannot simply assume that the Congress that enacted section 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 17 of 34
18 

6501(e)(1)(A) understood the phrase “omits from gross 

income” in the same way as the Congress that originally 

enacted section 275(c). Cf. Jama v. Immigration & Customs 

Enforcement, 543 U.S. 335, 349 (2005) (refusing to presume 

that Congress had incorporated purportedly settled 

interpretations of a statute when reenacting it where “[n]either 

of the two requirements for congressional ratification [had 

been] met . . . : Congress did not simply reenact [the statute] 

without change, nor was the supposed judicial consensus so 

broad and unquestioned that we must presume Congress knew 

of and endorsed it”). Nor can we assume that the Supreme 

Court’s 1958 interpretation of that phrase’s pre-1954, prereenactment meaning necessarily applies post-1954, postreenactment. Accordingly, before applying Colony to section 

6501(e)(1)(A), we must determine whether the Supreme 

Court even considered how Congress in 1954 understood the 

text it borrowed from section 275(c). 

Significantly, the Court concluded that the one source of 

continuity between section 275(c) and section 

6501(e)(1)(A)—the statutes’ essentially identical text—was 

indeterminate. After all, the Court explained, “it cannot be 

said that the language [of section 275(c)] is unambiguous.” 

See Colony, 357 U.S. at 33 (emphasis added). As a result, the 

Court ultimately relied on a different source, one not shared 

by section 275(c) and section 6501(e)(1)(A)—namely, section 

275(c)’s legislative history. By contrast, the Court considered 

neither section 6501(e)(1)(A)’s legislative history nor the 

context in which Congress passed that provision. This was no 

mere oversight. Colony and the Commissioner both cited 

these materials and debated whether Congress in 1954 had 

endorsed Colony’s or the Commissioner’s interpretation of 

the relevant text. Pet’r’s Br. 23–24, Colony, 357 U.S. 28 

(1958) (No. 306), 1958 WL 91875; Resp’t’s Br. 23–24, 

Colony, 357 U.S. 28 (1958) (No. 306), 1958 WL 91876; 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 18 of 34
19 

Pet’r’s Reply Br. 6–8, Colony, Inc., 357 U.S. 28 (1958) (No. 

306), 1958 WL 91877. The Court expressly declined to 

resolve this debate, however, viewing it as entirely 

“speculative.” Colony, 357 U.S. at 37 (“And without doing 

more than noting the speculative debate between the parties as 

to whether Congress [in 1954] manifested an intention to 

clarify or to change the 1939 Code . . . .”). 

Nor do the Court’s few references to section 

6501(e)(1)(A) suggest it actually considered that provision’s 

potentially distinctive meaning. Indeed, the Court first 

mentioned the new statute in order to explain that although 

the question presented had been “resolved for the future by 

[section] 6501(e)(1)(A) of the Internal Revenue Code of 

1954,” it had nonetheless granted certiorari because that 

question remained unresolved “for earlier taxable years” still 

governed by section 275(c). Colony, 357 U.S. at 32. Rather 

than signaling that it was interpreting both the pre- and post1954 tax code, this passage strongly suggests that the Court 

was focusing on section 275(c), not section 6501(e)(1)(A). 

Intermountain’s sole argument to the contrary focuses on 

Colony’s only other reference to section 6501(e)(1)(A), in 

which the Court “observe[d] that the conclusion we reach 

[about the meaning of section 275(c)] is in harmony with the 

unambiguous language of [section] 6501(e)(1)(A) of the 

Internal Revenue Code of 1954.” Id. at 37. Because the Court 

cited only section 6501(e)(1)(A), not that section’s new 

subsections, Intermountain insists that the Court must have 

been referring to section 6501(e)(1)(A)’s principal 

paragraph—i.e., the one at issue in this appeal. According to 

Intermountain, then, the “harmony” the Court observed was 

between its holding and the meaning of the phrase “omits 

from gross income” in section 6501(e)(1)(A). 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 19 of 34
20 

The problem with Intermountain’s reading is that it 

makes this passage incomprehensible. In that passage, the 

Court called section 6501(e)(1)(A)’s text “unambiguous,” 

even though earlier in the opinion it had characterized section 

275(c)’s text as ambiguous. See Colony, 357 U.S. at 33 (“[I]t 

cannot be said that the language [of section 275(c)] is 

unambiguous.” (emphasis added)). Intermountain would thus 

have us believe that within the span of just four pages of the 

U.S. Reports, the Supreme Court illogically described 

essentially identical text as both ambiguous and unambiguous. 

We think a far more sensible reading is that the Court was 

referring only to section 6501(e)(1)(A)’s new subsection (i). 

After all, subsection (i) is certainly “unambiguous” and, by 

redefining gross income to mean gross receipts, subsection (i) 

provides a rule “in harmony” with Colony’s holding. Colony, 

357 U.S. at 37. Indeed, both Colony and the Commissioner 

made exactly this point to the Court, explaining that 

“[s]ubsection (i) expressly spells out the construction of 

Section 275(c) contended for by” Colony. Pet’r’s Br. 24, 

Colony, 357 U.S. 28 (1958) (No. 306), 1958 WL 91875; see 

also Pet’r’s Reply Br. 8, Colony, Inc., 357 U.S. 28 (1958) 

(No. 306), 1958 WL 91877 (explaining that subsection (i) will 

“prevent future controversies as to the applicability of the 

extended limitation period in ‘cost of goods sold’ cases”); 

Resp’t’s Br. 23–24, Colony, 357 U.S. 28 (1958) (No. 306), 

1958 WL 91876. Of course, there are differences between 

Colony’s holding and subsection (i). Most important for our 

purposes, subsection (i) applies only to the sale of goods or 

services in the trade or business context, while nothing in 

Colony suggests that the Court’s holding is so limited. But 

given that Colony described itself as a taxpayer in a trade or 

business with income from the sale of goods or services—i.e., 

as falling within subsection (i)’s scope had the subsection 

applied pre-1954—the Court had no reason to remark on this 

particular divergence. See Comm’r’s Reply Br. 6–7, UTAM, 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 20 of 34
21 

Ltd. v. Comm’r, No. 10-1262 (D.C. Cir. Feb. 28, 2011) 

(reviewing how Colony described itself in its briefs to the tax 

court and the Supreme Court); see also Salman Ranch II, __ 

F.3d __, 2011 WL 2120044, at *6 (explaining that Colony 

would have fit within the scope of subsection (i)); Beard, 633 

F.3d at 620 (same). 

In sum, to the extent the Court in Colony referred to 

section 6501(e)(1)(A), it did so only to acknowledge that it 

was interpreting section 275(c) consistently with the new 

subsection (i) that Congress had added in 1954 to address the 

same issue prospectively in the trade or business context. 

Because that observation does not directly control the 

question presented here, and because it otherwise seems clear 

to us that the Court in Colony dealt only with the limited task 

of interpreting section 275(c) of the 1939 code for cases 

arising under that code, we believe the Court left unresolved 

the issue now before us—namely, how to interpret section 

6501(e)(1)(A)’s “omits from gross income” language in cases 

that fall beyond subsection (i)’s scope. It is to that question 

that we now turn, keeping in mind that we may only reject the 

Commissioner’s interpretation at Chevron step one if 

Congress has unambiguously foreclosed it. Vill. of 

Barrington, 636 F.3d at 659. 

Focusing first on section 6501(e)(1)(A)’s relevant text—

“omits from gross income an amount properly includible 

therein which is in excess of 25 percent of the amount of 

gross income stated in the return”—we are, though not 

technically bound by Colony, see supra 16–21, nonetheless 

inclined to agree with the Supreme Court’s judgment that this 

text, even read in isolation, is susceptible to both the 

Commissioner’s and Intermountain’s interpretations. Colony, 

357 U.S. at 33 (“[I]t cannot be said that the language [of 

section 275(c)] is unambiguous”). But even if we disagreed 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 21 of 34
22 

with the Court, once that text is read in the context of the new 

subsection (i), added in 1954, we think the Commissioner’s 

reading quite possibly better. Remember that subsection (i) 

expressly redefines “gross income” in the trade or business 

context such that overstatements of basis cannot themselves 

trigger the extended statute of limitations. Because 

Intermountain’s interpretation of section 6501(e)(1)(A)’s 

principal paragraph would accomplish exactly the same result 

but for all taxpayers, including those engaged in a trade or 

business, its interpretation renders subsection (i) largely 

redundant. In effect, Intermountain contends that Congress 

added a provision designed to exempt basis overstatements 

even though it believed that the existing language already 

accomplished exactly that goal. Because we generally 

presume Congress does not add provisions that simply 

replicate what the statute already does, see Stone v. INS, 514 

U.S. 386, 397–98 (1995), we believe it at least plausible that 

in 1954 Congress understood the “omits from gross income” 

language to include basis overstatements and added 

subsection (i) as an exception limited to the trade or business 

context. 

Resisting that conclusion, Intermountain points out that 

“gross income” plays two different roles in section 

6501(e)(1)(A), only one of which its interpretation makes 

superfluous. Specifically, subsection (i)’s gross income 

definition affects not only what counts as an “omission from 

gross income,” but also whether a taxpayer’s total omissions 

exceed 25 percent “of the amount of gross income stated in 

the return,” thus triggering the extended period. 26 U.S.C. § 

6501(e)(1)(A) (emphasis added). Because its interpretation of 

“omits from gross income” in no way encroaches on 

subsection (i)’s second role, Intermountain contends, any 

redundancy between that interpretation and subsection (i)’s 

first role is irrelevant. 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 22 of 34
23 

Intermountain’s point is well taken, but it fails to account 

fully for subsection (i)’s first role—the one its interpretation 

admittedly makes irrelevant and that actually led Congress to 

add subsection (i) in the first place. Recall that Congress 

added subsection (i) amidst a debate that had divided the 

courts of appeals and that specifically revolved around 

whether basis overstatements constituted omissions from 

gross income. See supra 7–10. Given that context, it seems 

obvious that Congress intended subsection (i) to resolve that 

debate in the taxpayers’ favor, though only in the trade or 

business context. Indeed, that is exactly how the amendment 

was contemporaneously understood by the amendment’s 

supporters, by the parties who argued Colony, and by the 

Supreme Court itself. See supra 17 (citing Colony, 357 U.S. at 

32; Pet’r’s Reply Br. 8, Colony, Inc., 357 U.S. 28 (1958) (No. 

306), 1958 WL 91877; Wyatt Letter at 984–85). Thus, 

although Intermountain is technically correct that its 

interpretation avoids turning subsection (i) into surplusage, 

we agree with the Seventh Circuit that it nonetheless 

“certainly diminishe[s]” the provision’s independent 

significance in a way seemingly at odds with Congress’s 

original intent. Beard, 633 F.3d at 622; see also Babbitt v. 

Sweet Home Chapter of Cmtys. for a Great Or., 515 U.S. 687, 

701 (1995) (“When Congress acts to amend a statute, we 

presume it intends its amendment to have real and substantial 

effect.” (internal quotation marks omitted)). 

Perhaps recognizing this problem, the Ninth Circuit 

suggested that Congress enacted subsection (i) only to clarify 

the statute’s previous meaning, not to change it. See 

Bakersfield, 568 F.3d at 776. According to this theory, 

Congress believed the phrase “omits from gross income” 

already excluded basis overstatements yet passed 

subsection (i) to make that understanding unmistakably clear. 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 23 of 34
24 

But this theory is hardly robust enough to satisfy Chevron

step one’s demanding burden. Moreover, section 

6501(e)(1)(A)’s House and Senate Committee reports both 

directly contradict this so-called clarification theory by 

characterizing subsection (i) as a “change[] from existing 

law” that “redefine[s]” gross income in the trade or business 

context. H.R. Rep. No. 83-1337, at 503 (1954), reprinted in

1954 U.S.C.C.A.N. at 4562; S. Rep. No. 83-1622, at 558 

(1954), reprinted in 1954 U.S.C.C.A.N. at 5233. We are thus 

unpersuaded that Congress intended subsection (i) as a mere 

clarification. 

Finally, Intermountain argues that even if the “omits from 

gross income” language had an ambiguous meaning when 

passed in 1954, Congress has since ratified the application of 

Colony’s interpretation to sections 6501(e)(1)(A) and 

6229(c)(2). In support, it points out that Congress reenacted 

section 6501(e)(1)(A) many times and that it enacted section 

6229(c)(2)—all after the Court in Colony definitively 

interpreted section 275(c)’s corresponding language. This 

theory, however, collides with our understanding of Colony as 

interpreting only section 275(c). See supra 16–21. Given that 

the Supreme Court limited itself to interpreting section 

6501(e)(1)(A)’s predecessor, we have no reason to presume 

from Congress’s silence that it treated that opinion as having 

authoritatively interpreted section 6501(e)(1)(A) itself. Nor do 

we see any clear reason to treat section 6229(c)(2) differently, 

especially since it seems likely that when first enacting that 

section, Congress intended it to have the same meaning as 

still-operative section 6501(e)(1)(A) rather than that of longsince defunct section 275(c). 

In a post-argument letter filed pursuant to Federal Rule of 

Appellate Procedure 28(j), Intermountain offers a variation on 

this reenactment theory based on “the Commissioner’s prior 

position [i.e., before the Son of BOSS controversy] on the 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 24 of 34
25 

import and effect of the Supreme Court’s decision in Colony.” 

Appellees’ 28(j) Letter 1, Apr. 11, 2011. Intermountain’s 

unsolicited attempt to introduce a new legal theory based on 

long-available sources neither included in its brief nor even 

raised at oral argument comes far too late to warrant our 

attention. See United States ex rel. Miller v. Bill Harbert Int’l 

Const., Inc., 608 F.3d 871, 878 n.1 (D.C. Cir. 2010) (treating 

as forfeited arguments raised for the first time in a post-oral 

argument 28(j) letter unless based on new authority). 

In sum, because the Court in Colony never purported to 

interpret section 6501(e)(1)(A); because section 

6501(e)(1)(A)’s “omits from gross income” text is at least 

ambiguous, if not best read to include overstatements of basis; 

and because neither the section’s structure nor its legislative 

history nor the context in which it was passed nor its 

reenactment history removes this ambiguity, we conclude 

that, outside the trade or business context, nothing in section 

6501(e)(1)(A) unambiguously forecloses the Commissioner 

from interpreting “omissions from gross income” as including 

basis overstatements. We reach the same conclusion with 

respect to section 6229(c)(2) in light of Intermountain’s 

failure to timely raise any argument that the two provisions 

should be interpreted differently outside the trade or business 

context. See supra 12–13. 

IV. 

Given this conclusion, we would ordinarily next analyze 

the Commissioner’s interpretation of sections 6501(e)(1)(A) 

and 6229(c)(2) under Chevron step two. But Intermountain 

insists that the Commissioner’s interpretation is entitled to no 

Chevron deference at all. Specifically, it argues that the 

regulations were promulgated in a manner that lacked “ ‘the 

fairness and deliberation that should underlie a 

pronouncement’ meriting Chevron deference” given that the 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 25 of 34
26 

“Commissioner[] reactive[ly] issu[ed] . . . the [regulations] 

immediately following the rejection of his identical litigating 

position by two Courts of Appeals and the Tax Court.” 

Appellees’ Br. 37 (quoting United States v. Mead Corp., 533 

U.S. 218, 230 (2001)). Embracing this argument, amicus 

Bausch & Lomb quotes the Second Circuit’s decision in 

Chock Full O’ Nuts Corp. v. United States: “[T]he 

Commissioner may not take advantage of his power to 

promulgate retroactive regulations during the course of 

litigation for the purpose of providing himself with a defense 

based on the presumption of validity accorded to such 

regulations.” 453 F.2d 300, 303 (2d Cir. 1971). 

Notwithstanding the rhetorical force of this argument, we 

agree with the Commissioner that it runs afoul of binding 

Supreme Court precedent that has, for all practical purposes, 

superseded Chock Full O’ Nuts. As a general matter, the 

Supreme Court has made crystal clear that it is utterly 

“irrelevant” to the question of whether Chevron deference is 

due “[t]hat it was litigation which disclosed the need for the 

regulation.” Smiley v. Citibank (South Dakota), N.A., 517 U.S. 

735, 741 (1996). Indeed, just this Term, while granting 

Chevron deference to another Treasury regulation interpreting 

the tax code, the Supreme Court explained that “we have 

found it immaterial to our analysis that a regulation was 

prompted by litigation.” Mayo Found., 131 S. Ct. at 712 

(internal quotation marks omitted). Nor, the Court has held, 

does it matter that the agency promulgating the regulation is a 

party in the very case that prompted the regulation and that 

the agency, having lost in the lower courts, now seeks to rely 

on the regulation to reverse its loss on appeal. Confronting 

exactly that scenario in United States v. Morton, the Court 

reasoned that even “assuming the promulgation of [the 

regulation] was a response to this suit, that demonstrates only 

that the suit brought to light an additional administrative 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 26 of 34
27 

problem of the type that Congress thought should be 

addressed by regulation.” 467 U.S. 822, 835 n.21 (1984). 

Indeed, according to the Commissioner, that is exactly the 

case here where “[f]or almost 50 years, no problems regarding 

Colony’s application of [section] 6501(e)(1)(A) outside the 

trade-or-business context occurred until 2007, when the Tax 

Court . . . and the Court of Federal Claims . . . applied Colony

to block application of the six-year assessment period to 

understated capital gain resulting from basis overstatements.” 

Appellant’s Br. 48 (referring to Bakersfield, 128 T.C. 207 and 

Grapevine Imports, 77 Fed. Cl. 505 (2007), rev’d, 636 F.3d 

1368). Thus bound by exactly on-point Supreme Court 

precedent, we reject Intermountain’s argument. 

 The partnership in the companion case, UTAM, offers 

another argument for denying Chevron deference to the 

Commissioner—namely, that “[i]nterpreting a statute of 

limitations [like the ones here] is outside Treasury’s 

expertise.” Appellee UTAM’s Br. 34, UTAM, Ltd., No. 10-

1262 (D.C. Cir. Feb. 7, 2011). UTAM finds some support for 

this argument in a Third Circuit decision ruling Chevron

inapplicable to INS’s interpretation of a statute of limitations 

because “a statute of limitations is a general legal concept 

with which the judiciary can deal at least as competently as 

can an executive agency.” Bamidele v. INS, 99 F.3d 557, 562 

(3d Cir. 1996). Expressly rejecting that analysis, the Fourth 

Circuit recognized that statutes of limitations may be 

embedded within complex and deeply interconnected 

regulatory systems, thus requiring “precisely the sort of 

agency expertise to which Chevron requires the courts to 

defer.” See Asika v. Ashcroft, 362 F.3d 264, 271 n.8 (4th Cir. 

2004). Although this circuit has yet to decide whether or 

under what circumstances to give Chevron deference to 

agency interpretations of statutes of limitations, we find the 

Fourth Circuit’s reasoning more persuasive than the Third’s, 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 27 of 34
28 

at least in the context of this case. Cf. Kennecott Utah Copper 

Corp. v. Dep’t of Interior, 88 F.3d 1191, 1210 (D.C. Cir. 

1996) (assuming without deciding that Chevron deference 

was owed an Interior regulation interpreting a statute of 

limitations); Nat’l Grain & Feed Ass’n v. OSHA, 845 F.2d 

345, 346 (D.C. Cir. 1988) (per curiam) (suggesting that 

Chevron deference would be owed to an OSHA regulation 

interpreting a statute of limitations were OSHA to later issue 

one). The interpretive question here is exactly like the one 

described by the Fourth Circuit, involving, as it does, the 

Commissioner’s complex administrative system for assessing 

tax deficiencies and his expert interpretation of technical 

statutory language (“omits from gross income”). 

 Arriving at last at Chevron step two, our task is easy. 

Intermountain’s only argument that the Commissioner’s 

interpretation is unreasonable is that it conflicts with Colony. 

But having held that Colony applies neither to section 

6501(e)(1)(A) nor to section 6229(c)(2), see supra 16–21, we 

see nothing unreasonable in the Commissioner’s decision to 

diverge from Colony’s holding. 

V. 

Finally, Intermountain and UTAM advance several 

arguments for why the regulations neither apply to 

Intermountain (or UTAM) nor were validly promulgated. We 

consider each in turn. 

Reiterating an argument on which the Tax Court relied, 

Intermountain first contends that the Commissioner’s 

regulations are inapplicable to this case under their own 

“effective/applicability date” provisions. Those provisions 

state: 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 28 of 34
29 

Effective/applicability date. . . . [T]his section 

applies to taxable years with respect to which 

the period for assessing tax was open on or 

after September 24, 2009. 

26 C.F.R. §§ 301.6501(e)-1(e)(1); 301.6229(c)(2)-1(b) 

(2011); see also 26 C.F.R. §§ 301.6501(e)-1T(b) (2009); 

301.6229(c)(2)-1T(b) (The temporary regulations in effect 

when the Tax Court ruled included a slightly different version 

of this provision which, with the changes italicized, stated: 

“The rules of this section apply to taxable years with respect 

to which the applicable period for assessing tax did not expire

before September 24, 2009.”). In the preamble to the final 

regulations, the Commissioner interpreted the phrase “the 

period for assessing tax” to include “all assessment periods 

Congress has provided, including the six-year period,” 

Appellant’s Reply Br. 28, meaning “the final regulations 

apply to taxable years with respect to which the six-year 

period for assessing tax under section 6229(c)(2) or 

6501(e)(1) was open on or after September 24, 2009,” T.D. 

9511, 75 Fed. Reg. at 78,898. The preamble, in turn, explains 

that a taxable year is “open” if, among other things, it is the 

“subject of any case pending before any court of competent 

jurisdiction . . . in which a decision had not become final 

(within the meaning of section 7481).” Id. Finally, section 

7481 provides, in effect, that a decision is not final “until the 

last bell has rung in the last court.” Appellant’s Reply Br. 29. 

In other words, according to the Commissioner, the 

regulations apply at least to any taxpayer or partnership 

whose case was pending in any court at any level on or after 

September 24, 2009, which all agree includes Intermountain. 

See also IRS Chief Counsel Notice CC-2010-001 (Nov. 23, 

2009) (interpreting “the temporary regulations [to] apply to 

any docketed Tax Court case in which the period of 

limitations under sections 6229(c)(2) and 6501(e)(1)(A), as 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 29 of 34
30 

interpreted in the temporary regulations, did not expire with 

respect to the tax years at issue, before September 24, 2009, 

and in which no final decision has been entered.”). 

Intermountain argues that the Commissioner’s 

interpretation essentially requires us to apply the regulations 

before determining whether they are even applicable—an 

approach the Tax Court characterized as “irreparably marred 

by circular, result-driven logic.” Intermountain II, 134 T.C. at 

219. Instead, Intermountain argues, we must first apply the 

applicability provision based not on the new law set out in the 

regulations’ other provisions, but rather on the law as it 

existed before the regulations were issued. Because 

Intermountain believes that Colony represents the preregulation state of the law, and because under Colony only the 

three year statute of limitations would have applied, 

Intermountain insists that the only relevant “period for 

assessing tax” expired, and so closed, before September 24, 

2009. According to Intermountain, then, the regulations do 

not even reach this case. 

We grant the highest level of deference to an agency’s 

interpretation of its own regulations, deferring unless the 

interpretation is “plainly erroneous or inconsistent with the 

regulation.” Auer v. Robbins, 519 U.S. 452, 461 (1997) 

(internal quotation marks omitted). Although Intermountain’s 

critique has some force, we think it ultimately insufficient to 

overcome this extraordinarily deferential standard of review. 

To begin with, Intermountain’s argument depends in 

significant part on the notion, rejected above, that before the 

regulations issued, Colony applied to sections 6501(e)(1)(A) 

and 6229(c)(2). But because the pre-regulation state of the 

law was neither settled nor clear, the Commissioner could 

reasonably read each of the regulations’ provisions, including 

the applicability provision, in light of the others. Moreover, 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 30 of 34
31 

we have no doubt that the Commissioner intended from the 

moment these regulations issued to apply them to cases 

pending as of September 24, 2009, leaving us confident that 

this interpretation is no “post-hoc rationalization[].” Bowen v. 

Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988) (internal 

quotation marks omitted). After all, the regulations were 

prompted by, among other things, this and other similar 

pending cases; the interpretation was first articulated in a 

Chief Counsel’s Notice shortly after publication of the 

temporary regulations and while the final regulations’ 

comment period remained open; and the Commissioner 

announced his definitive interpretation in the preamble to the 

final regulations. In sum, although the Commissioner created 

a needlessly complex problem for himself by drafting a fairly 

cryptic applicability provision, his interpretative solution is 

neither plainly erroneous nor inconsistent with the regulation. 

The regulations thus apply to this case. 

Intermountain next contends that applying the regulations 

under the circumstances of this case would make them 

impermissibly retroactive. This is so, Intermountain says, 

because the regulations change settled law—namely, 

Colony’s interpretation of sections 6501(e)(1)(A) and 

6229(c)(2)—thus disrupting the expectations of taxpayers or 

partnerships who filed returns for tax years prior to the 

regulations’ effective date. We disagree. Because Colony

never applied to section 6501(e)(1)(A) or section 6229(c)(2), 

see supra 16–21, there was no settled law for the regulations 

to change. Given our treatment of Colony, the most 

Intermountain might have argued is that the regulations raise 

a different sort of retroactivity issue, i.e., that they bring 

clarity to an area of the law that had been ambiguous during 

the tax year at issue in this case. But because neither 

Intermountain nor UTAM makes this particular argument, we 

decline to consider it. United States v. Reeves, 586 F.3d 20, 26 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 31 of 34
32 

(D.C. Cir. 2009) (declining to address an argument not argued 

on appeal). 

 Focusing next on the regulatory process, UTAM and 

amicus Bausch & Lomb urge us not to apply the final 

regulations because, they say, the Commissioner failed to 

keep an “open mind” during the notice-and-comment period. 

Ordinarily, we evaluate an agency’s so-called open 

mindedness only when it issues final regulations without the 

requisite comment period and then tries to cure that 

Administrative Procedure Act violation by holding a postpromulgation comment period. See, e.g., Advocates for 

Highway & Auto Safety v. Fed. Highway Admin., 28 F.3d 

1288, 1291–93 (D.C. Cir. 1994). Here, the Commissioner 

simultaneously issued immediately effective temporary 

regulations and a notice of proposed rulemaking for identical 

final regulations and then held a 90-day comment period 

before finalizing the regulations. According to UTAM and 

Bausch & Lomb, that procedure, although typical of the 

Commissioner’s practice, violates the Administrative 

Procedure Act, thus requiring an open-mindedness inquiry. 

Even assuming the applicability of this framework, 

however, we believe the final regulations were validly 

promulgated. UTAM and Bausch & Lomb criticize the 

Commissioner for the preamble’s “silen[ce] regarding the 

numerous arguments” advanced in voluminous related 

litigation, Amicus’s Br. 14–15, and for “ma[king] only 

immaterial changes” in response to those comments, Appellee 

UTAM’s Br. 55. But an open-mindedness review focuses not 

on whether the Commissioner responded to litigants, but 

rather on whether he has “afforded the comments [received 

during the comment period] particularly searching 

consideration.” Advocates for Highway & Auto Safety, 28 

F.3d at 1292 (emphasis added) (internal quotation marks 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 32 of 34
33 

omitted). Moreover, “[w]hile changes and revision are 

indicative of an open mind, an agency’s failure to make any 

does not mean its mind is closed.” Id. Here, the 

Commissioner received only one comment, which 

characterized the proposed regulations as having “retroactive 

effect ‘in that taxable years which had closed are now 

reopened.’ ” T.D. 9511, 75 Fed. Reg. at 78,898 (quoting 

comment received). Responding to this comment in the 

preamble to the final regulations, the Commissioner 

“disagreed with the characterization of the regulations as 

retroactive” and noted that “[t]he final regulations have been 

clarified to emphasize that they only apply to open tax years, 

and do not reopen closed tax years.” Id. This last response 

appears to mean that although the regulations apply to 

pending cases such as this one, they have no applicability to 

cases such as Bakersfield Energy Partners, 568 F.3d 767, in 

which the Commissioner lost and declined to appeal. The 

Commissioner also responded to the commenter’s reliance on 

the 1996 amendments to section 7805(b), which prohibit the 

Commissioner from making certain regulations retroactive. 

Specifically, the Commissioner explained that those 

amendments have no applicability to the statutory provisions 

interpreted by the regulations and, in any event, that “these 

regulations are not retroactive.” T.D. 9511, 75 Fed. Reg. at 

78,898. Given the Commissioner’s “searching consideration” 

of the comment, we have no doubt that he kept the requisite 

open mind. Advocates for Highway & Auto Safety, 28 F.3d at 

1292 (internal quotation marks omitted). 

VI. 

 In sum, the Commissioner’s regulations were validly 

promulgated, apply to this case, qualify for Chevron

deference, and pass muster under the traditional Chevron twostep framework. Because the Tax Court concluded otherwise 

and failed to apply the Commissioner’s interpretation of 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 33 of 34
34 

sections 6501(e)(1)(A) and 6229(c)(2), we reverse that court’s 

grant of summary judgment. In addition, we remand for the 

Tax Court to consider Intermountain’s alternative argument, 

made in the tax court but unaddressed there, that 

Intermountain avoided triggering the extended statute of 

limitations by “adequately disclos[ing] to the IRS the basis 

amount it applied in connection with the transaction at issue.” 

Appellees’ Br. 57 (emphasis added) (relying on section 

6501(e)(1)(A)(ii)). 

So ordered. 

USCA Case #10-1204 Document #1324875 Filed: 08/18/2011 Page 34 of 34