Opinion ID: 2995339
Heading Depth: 3
Heading Rank: 1

Heading: 263(a)-2, 1.461-1(a)(2). But this is

Text: not a case where the regulations themselves fully answer the question before us. Instead, another layer of interpretation has been laid on top of the regulations: the Commissioner has informed the courts throughout the course of this litigation that the term substantially as used in the regulations should be interpreted to cover anything that extends more than a few days, or perhaps a month, into the second tax year. This is so regardless of the implications for the capitalization decision of the other factors normally used to draw the line between ordinary and capital expenses. In the ordinary case, our focus is on the deference we must give to a regulation itself. After Mead, we know that we give full deference under Chevron v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), only to regulations that were promulgated with full notice-and-comment or comparable formalities. See Mead, 121 S. Ct. at 2171. We also know that deference to agency positions is not an all-or-nothing proposition; more informal agency statements and positions receive a more flexible respect, in which factors like the degree of the agency’s care, its consistency, formality, and relative expertness, and . . . the persuasiveness of the agency’s position, are all relevant. Id. Finally, in the typical case where the validity of a regulation is at issue, we have explained before that Chevron requires us to apply a two- step analysis:
in this case, the relevant section of the tax code. If the plain meaning of the text either supports or opposes the regulation, then we stop our analysis and either strike or validate the regulation. But if we conclude the statute is either ambiguous or silent of the issue, we continue to the second step:
regulation. If the regulation is a reasonable reading of the statute, we give deference to the agency’s interpretation. Bankers Life & Cas. Co. v. United States, 142 F.3d 973, 983 (7th Cir. 1998). In the present case, however, no one is arguing that the regulations the Commissioner has promulgated are invalid or that they are inconsistent with the text of the Code. The issue is instead whether the Commissioner’s interpretation of his own regulations is a reasonable one. And as to that, there is no question but that the interpretive methodologies he has used have been informal. The interpretation with which we are concerned has emerged inferentially in the way the IRS has applied the rules to different cases and it has appeared through the litigating positions the Service has taken. Both the informality of this interpretation and the context in which it has arisen persuade us that full Chevron deference is not appropriate here. Mead expressly disapproved of the exercise of such deference for the customs regulations that were at issue there, in part because of the boot- strapping that could otherwise occur. With full Chevron deference, agencies could pass broad or vague regulations through notice-and-comment procedures, and then proceed to create rules through ad hoc interpretations that were subject only to limited judicial review. All told, we think this is a clear case for the flexible approach Mead described, relying on the Supreme Court’s earlier decision in Skidmore v. Swift & Co., 323 U.S. 134 (1944), and we thus proceed on that basis.