Court Opinion

ID: 4474255
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:51.317674+00
Date Added: 2024-06-11T12:23:18.831396
License: Public Domain

Vasquez, J., dissenting: The majority has failed to convince me that we should not abide by our previous holding in Redlark v. Commissioner, 106 T.C. 31 (1996), revd. and remanded 141 F.3d 936 (9th Cir. 1998). I continue to agree that section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987) (the 9T regulation), is invalid for the reasons stated in the majority and concurring opinions in Redlark. I write separately, however, to address the appropriate standard of review applicable to the case at bar in light of the U.S. Supreme Court’s opinion in United States v. Mead Corp., 533 U.S. 218 (2001), and the various Courts of Appeals’ opinions — including the Fifth, Seventh, Eighth, Ninth, and District of Columbia Circuit opinions — addressing Mead. I. Mead In Mead, the U.S. Supreme Court clarified the limits of deference pursuant to Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), owed to an agency’s interpretation of a statute it administers. The Court held that an agency’s interpretation of a particular statutory provision qualifies for Chevron deference when (1) Congress delegated authority to the agency to make rules carrying the force of law, and (2) the agency interpretation claiming deference was promulgated in the exercise of that authority. United States v. Mead Corp., supra at 226-227. Thus, the delegation of authority by Congress to the agency is insufficient in and of itself to entitle the agency implementation to Chevron deference; the agency must also actually invoke the authority delegated. Id. at 226-227, 237. The Court clarified Chevron by stating that the delegation of authority may be either explicit or implicit, and when Chevron deference applies, a reviewing court is obliged to accept the agency’s position if Congress has not previously spoken to the point at issue and the agency’s interpretation is reasonable. Id. at 227, 229. Thus, any regulation entitled to Chevron deference is binding on the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute. Id. at 227. Precedential value alone, however, does not add up to Chevron entitlement; interpretive rules sometimes may function as precedents, and they enjoy no Chevron status as a class. Id. at 232. Although not limiting Chevron deference to situations where notice-and-comment rulemaking or formal adjudications took place, the Court focused on these attributes and stated they are significant in determining whether Congress contemplated administrative action with the effect of law and whether Chevron deference is appropriate.1 Id. at 230, 231, 233, 234. When an agency’s interpretation of a particular statutory provision does not qualify for Chevron deference, it still may merit some deference pursuant to Skidmore v. Swift & Co., 323 U.S. 134 (1944). United States v. Mead Corp., supra at 234-235, 237. Pursuant to Skidmore, the agency’s interpretation would be accorded respect proportional to its “power to persuade”. Id. at 235. II. Chronology of the Caselaw Pre-Mead A. Miller — Eighth Circuit " The U.S. Court of Appeals for the Eighth Circuit was the first Court of Appeals to address the validity of the 9T regulation. Miller v. United States, 65 F.3d 687 (8th Cir. 1995). The Court of Appeals for the Eighth Circuit relied on Chevron to determine the validity of the 9T regulation. Id. at 689. The court did not state that section 163(h)(2)(A) was ambiguous; instead, it concluded that Congress failed to define what constitutes “business interest”2 in the statute, and this was an implicit legislative delegation of authority to the Commissioner. Id. at 690. But see Judge Swift’s dissent p. 108. The court then relied on the General Explanation of the Tax Reform Act of 1986 (Blue Book) issued by the staff of the Joint Committee on Taxation to conclude that the 9T regulation was a permissible construction of the statute. Id. at 690-691. B. Redlark 1. Tax Court In Redlark, we noted that the 9T regulation was an interpretive, rather than a legislative, regulation. Redlark v. Commissioner, 106 T.C. at 38. We respectfully disagreed with the Court of Appeals for the Eighth Circuit’s conclusion and held that the 9T regulation was unreasonable and an impermissible reading of the statute. Id. at 47. In dissent, Judge Halpern stated that in the absence of temporary regulations a reasonable interpretation of section 163(h)(2)(A) would include the interest here in question and that deficiency interest attributable to nonemployee trade or business income is not personal interest. Id. at 65 (Halpern, J., dissenting). In his view, however, we should have upheld the 9T regulation as valid as it was entitled to Chevron deference. Id. at 66 (Halpern, J., dissenting). 2. Ninth Circuit The U.S. Court of Appeals for the Ninth Circuit, agreeing with the Eighth Circuit, reversed. Redlark v. Commissioner, 141 F.3d at 938, 941. The Court of Appeals for the Ninth Circuit, like that of the Eighth Circuit, also treated the 9T regulation as a legislative regulation. Id. at 940. The court gave the 9T regulation Chevron deference and stated that the issue was whether the 9T regulation was a permissible interpretation of section 163(h). Id. at 938. The Court of Appeals for the Ninth Circuit acknowledged that it was reasonable that income tax deficiencies should properly be considered allocable to their business. Id. at 939. The court, however, applied Chevron and, like the Eighth Circuit, relied on the Blue Book to conclude that the 9T regulation was a permissible construction of the statute. Id. at 939, 941. C. Allen — Fourth Circuit The U.S. Court of Appeals for the Fourth Circuit concluded that section 163(h) was ambiguous. Allen v. United States, 173 F.3d 533, 534 (4th Cir. 1999). It based this conclusion on “the absence of a statutory directive” as to the meaning of “properly allocable” and the fact that there were “sharply divergent opinions” in Redlark? Id. at 536. The court applied Chevron and accorded the 9T regulation Chevron deference. Id. at 537. The Court of Appeals for the Fourth Circuit also relied on the Blue Book to conclude that the 9T regulation was a permissible construction of the statute. Id. at 537-538. D. McDonnell — Sixth Circuit The U.S. Court of Appeals for the Sixth Circuit, without analysis, simply relied on the analysis of the Court of Appeals for the Ninth Circuit in Redlark. McDonnell v. United States, 180 F.3d 721, 723 (6th Cir. 1999). E. Kikalos — Seventh Circuit The U.S. Court of Appeals for the Seventh Circuit acknowledged that the 9T regulation is an interpretive regulation. Kikalos v. Commissioner, 190 F.3d 791, 795 (7th Cir. 1999), revg. T.C. Memo. 1998-92 (which relied on our opinion in Redlark). The Court of Appeals for the Seventh Circuit stated that “interpretive regulations of this sort, when subject to a notice-and-comment procedure, are reviewed deferentially, under the criteria articulated in” Chevron and its progeny. Id. The court noted that the 9T regulation did not go through notice and comment and that such a regulation might be entitled to no more deference than a proposed regulation.4 Id. at 796. The Court of Appeals for the Seventh Circuit, however, left for another day what deference a regulation of this sort is due because the parties assumed Chevron deference applied. Id. Therefore, the court accorded the 9T regulation Chevron deference. Id. The Court of Appeals for the Seventh Circuit acknowledged that in light of the cases predating the Tax Reform Act of 1986 (tra 1986), Pub. L. 99-514, 100 Stat. 2085, one could argue with some force that where an income tax deficiency results from a taxpayer’s trade or business, the interest accrued on that deficiency should be allocable to the trade or business. Id. at 797-798. Based on the Blue Book and the deference to be accorded under Chevron, however, the court upheld the validity of the regulation. Id. F. Summary of the Cases Thus, all five of the Courts of Appeals accorded the 9T regulation Chevron deference. III. Post-Mead Caselaw In the years that have passed since the U.S. Courts of Appeals issued their opinions regarding the 9T regulation, principles of law have developed regarding the Chevron doctrine. See supra part I. The U.S. Court of Appeals for the Fifth Circuit, the court to which appeal in the instant case lies, has stated: Mead clarified that Chevron’s expansive conception of judicial deference to an administrative agency’s legal interpretation applies only when “Congress delegated authority to the agency generally to make rules carrying the force of law, and * * * the agency interpretation claiming deference was promulgated in the exercise of that authority.’” Pool Co. v. Cooper, 274 F.3d 173, 177 n.3 (5th Cir. 2001). In the absence of Chevron deference, pursuant to Mead, the agency’s interpretation is accorded respect under Skidmore according to its “power to persuade”. Id. at 177; see also Landmark Legal Found. v. IRS, 267 F.3d 1132, 1135-1136 (D.C. Cir. 2001) (when Chevron deference does not apply, the IRS’s interpretations are entitled to “no more than the weight derived from their ‘power to persuade.’ ”). In light of Mead, Chevron deference is reserved for only those agency interpretations reached through notice-and-comment or comparable formal administrative procedures. Ind. Family & Soc. Servs. Admin. v. Thompson, 286 F.3d 476, 480 (7th Cir. 2002); TeamBank, N.A. v. McClure, 279 F.3d 614, 619 (8th Cir. 2002); U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137, 1141 (7th Cir. 2001) (involving the Commissioner of Internal Revenue), revg. 113 T.C. 329 (1999). While the Supreme Court left open the possibility that Chevron deference may be appropriate in instances similar to notice-and-comment rulemaking or formal adjudication, it did not clearly outline these instances.5 Matz v. Household Intl. Tax Reduction Inv. Plan, 265 F.3d 572, 574 (7th Cir. 2001). Agency interpretations that are not the result of such formal administrative procedures are entitled to the lesser deference accorded under Skidmore. Ind. Family & Soc. Servs. Admin. v. Thompson, supra at 480; Teambank, N.A. v. McClure, supra at 619 n.4; US. Freightways Corp. v. Commissioner, supra at 1141. Furthermore, in applying Mead, "mere ambiguity in a statute is not evidence of congressional delegation of authority”, agency authority is not to be lightly presumed, and courts should not presume a delegation of power based solely on the fact that there was not an express withholding of such power. Mich. v. EPA, 268 F.3d 1075, 1082 & n.2 (D.C. Cir. 2001). The fact that a court pr e-Mead found the agency’s position to be reasonable under the Chevron standard is insufficient; after Mead, if Chevron is inapplicable, the agency’s position must be persuasive. Matz v. Household Intl. Tax Reduction Inv. Plan, supra at 573-575 (applying this rule to the irs). It is “plain error for [courts] to rely on” Chevron in determining what deference to give agency actions without considering Mead. Am. Fedn. of Govt. Employees, AFL-CIO v. Veneman, 284 F.3d 125, 129 (D.C. Cir. 2002). To the extent decisions using a pre-Mead analysis differ from the analysis set forth in Mead, Mead controls. Hall v. EPA, 273 F.3d 1146, 1156 n.6 (9th Cir. 2001). IV. Applying Mead to This Case I note that “Chevron has had a checkered career in the tax arena.” Cent. Pa. Sav. Association v. Commissioner, 104 T.C. 384, 391 (1995). “The degree to which courts are bound by agency interpretations of law has been like quicksand. The standard seems to have been constantly shifting, steadily sinking, and, from the perspective of the intermediate appellate courts, frustrating.” Wolpaw v. Commissioner, 47 F.3d 787, 790 (6th Cir. 1995), revg. T.C. Memo. 1993-322. We have previously avoided, pre-Mead, the question of whether temporary regulations promulgated without notice- and-comment procedures are entitled to Chevron deference. UnionBanCal Corp. v. Commissioner, 113 T.C. 309, 316-317 (1999). We also have previously questioned, pre-Mead, whether Chevron applies to interpretive regulations. Cent. Pa. Sav. Association v. Commissioner, supra at 391 (citing E.I. duPont de Nemours & Co. v. Commissioner, 41 F.3d 130 (3d Cir. 1994), affg. 102 T.C. 1 (1994)). The question of what deference interpretive regulations, including temporary regulations issued without notice-and-comment procedures, are entitled to needs to be answered in light of Mead. The first question in the Mead analysis is whether Congress delegated authority to the agency to make rules carrying the force and effect of law. United States v. Mead Corp., supra at 226-227; Pool Co. v. Cooper, supra at 177 n.3. The second question is whether the agency invoked that authority. United States v. Mead Corp., supra; Pool Co. v. Cooper, supra. In this case, however, even assuming that we were to answer the first question in the affirmative, we must answer the second question — whether the agency invoked the authority delegated — in the negative for the reasons set forth below. Regulations are either legislative or interpretive in character. Tutor-Saliba Corp. v. Commissioner, 115 T.C. 1, 7 (2000). Interpretive regulations are promulgated under the general authority vested in the Secretary by section 7805, whereas legislative regulations are issued pursuant to a specific congressional delegation to the Secretary. Id.; Hefti v. Commissioner, 97 T.C. 180, 189 (1991), affd. 983 F.2d 868 (8th Cir. 1993). “An interpretive regulation may be contrasted to a legislative regulation, one which is mandated specifically in the statute and has the force and effect of law.” Matheson v. Commissioner, 74 T.C. 836, 840 n.7 (1980). In Redlark v. Commissioner, 106 T.C. at 38, we stated: The regulations involved herein were promulgated pursuant to the general authority granted to the Secretary of the Treasury by section 7805(a) and not pursuant to specific legislative authority, T.D. 8168, 1988-1 C.B. 80, 83; they are therefore interpretive. The majority opinion in this case agrees with this conclusion, and the Commissioner concedes that the 9T regulation is an interpretive regulation. Majority op. p. 67. As such, even if the statute were ambiguous, but see Chief Judge Wells’s dissent, and assuming Congress delegated authority to the IRS to make rules carrying the force and effect of law in this area, but see Judge Swift’s dissent p. 108, it appears that by choosing to issue the 9T regulation pursuant to section 7805 the Commissioner did not issue the 9T regulation pursuant to a specific congressional delegation authority having the force and effect of law. See Tutor-Saliba Corp. v. Commissioner, supra at 7; Matheson v. Commissioner, supra at 840 n.7. Thus, the 9T regulation is not entitled to Chevron deference; it is entitled only to Skidmore deference.6 United States v. Mead Corp., supra at 234-235; Pool Co. v. Cooper, supra at 177. V. The Majority Opinion The majority relies on the pr e-Mead opinions of the U.S. Courts of Appeals for the Fourth, Sixth, Seventh, Eighth, and Ninth Circuits to support its conclusion that the 9T regulation is valid. Majority op. pp. 50-51. This is wrong, as these cases were all decided pre-Mead. Am. Fedn. of Govt. Employees, AFL-CIO v. Veneman, supra at 129; Hall v. U.S. EPA, supra at 1156 n.6; Matz v. Household Intl. Tax Reduction Inv. Plan, supra at 575. In judging the validity of the 9T regulation, the majority accords an interpretive regulation “considerable weight”, states that it will uphold interpretive regulations if they implement the congressional mandate in some reasonable manner, applies the pr e-Mead analysis, and gives the 9T regulation Chevron deference. Majority op. pp. 67-68. In light of Mead, this analysis is improper. Additionally, as is pointed out by Judge Thornton in his concurring opinion, the majority relies on the Joint Committee staff summary (even though the conference committee chose to adopt language less restrictive than the staff summary) and on the Blue Book (even though the Blue Book goes far beyond the language of the conference committee report to insert ideas from the staff summary that it previously suggested to the conference committee, but which the conference committee rejected and even though the Blue Book was published during the 100th Congress while TRA 1986 was enacted during the 99th Congress). Majority op. pp. 53-54, 64-65. For the reasons stated in Judge Thornton’s concurring opinion, our opinion in Redlark, and Judge Laro’s concurring opinion in Redlark, I find this reliance unpersuasive. See also Judge Swift’s dissent p. 110. The majority acknowledges that section 163(h)(2)(A) does not compel the result contained in the 9T regulation but relies on the Joint Committee staff summary and Blue Book to conclude the 9T regulation is a permissible construction. Majority op. pp. 73-75. This would be a slender reed on which to conclude that the 9T regulation has the power to persuade and is entitled to deference under Skidmore v. Swift & Co., supra, especially in light of the acknowledgment that a reasonable interpretation of section 163(h)(2)(A) is that income tax deficiency interest attributable to non-employee trade or business income should properly be considered allocable to a trade or business and that the pre-TRA 1986 caselaw also supports this conclusion. Kikalos v. Commissioner, 190 F.3d at 797-798; Redlark v. Commissioner, 141 F.3d at 939; Redlark v. Commissioner, 106 T.C. at 65 (Halpern, J., dissenting). Deference only sets the framework for judicial analysis; it does not displace it. United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982); United States v. Cartwright, 411 U.S. 546, 550 (1973); Dresser Indus., Inc. v. Commissioner, 911 F.2d 1128, 1137 (5th Cir. 1990). The majority relies on Courts of Appeals opinions predating United States v. Mead Corp., supra, to analyze the validity of section 1.163-9T, Temporary Income Tax Regs. The majority’s analysis is incorrect; therefore, I respectfully dissent. Wells, Swift, Colvin, and Laro, JJ., agree with this dissenting opinion.  The Court cites numerous cases where notice-and-comment rulemaking took place, but only one where it did not, and Chevron deference was accorded. United States v. Mead Corp., 533 U.S. 218, 230 n.12, 231 n.13 (2001).    It is unclear why the court chose to focus on “business interest” rather than “personal inter-   Proposed regulations are generally not afforded any more weight than that of the position advanced by the Commissioner on brief. Gen. Dynamics Corp. v. Commissioner, 108 T.C. 107, 120 (1997); Laglia v. Commissioner, 88 T.C. 894, 897 (1987).    5 “Only when agencies act through ‘adjudication^] notice-and-comment rulemaking, or * * * some other [procedure] indicating] comparable congressional intent [whatever that means]’ is Chevron deference applicable * * * United States v. Mead Corp., supra at 240 (Scalia, J., dissenting).    It also appears that the 9T regulation is not entitled to Chevron deference for another reason: The 9T regulation did not go through notice and comment, there is no evidence that it went through comparable formal administrative procedures, and it remains in temporary form 15 years later. Ind. Family & Soc. Servs. Admin. v. Thompson, 286 F.3d 476, 480 (7th Cir. 2002); TeamBank, N.A. v. McClure, 279 F.3d 614, 619 (8th Cir. 2002); U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137, 1141 (7th Cir. 2001), revg. 113 T.C. 329 (1999); Kikalos v. Commissioner, 190 F.3d 791, 796 (7th Cir. 1999), revg. T.C. Memo. 1998-92.