Court Opinion

ID: 4472430
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:25:30.993479+00
Date Added: 2024-06-11T08:49:06.949012
License: Public Domain

Wells J., dissenting: Although I agree with much of what the majority opinion has to offer in the way of criticisms of the decisions of the Courts of Appeals in Peoples Fed. Sav. & Loan Association v. Commissioner, 948 F.2d 289 (6th Cir. 1991), revg. T.C. Memo. 1990-129; Pacific First Fed. Sav. Bank v. Commissioner, 961 F.2d 800, 805 (9th Cir. 1992), revg. 94 T.C. 101 (1990); and Bell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d 224 (7th Cir. 1994), revg. and remanding T.C. Memo. 1991-368, I cannot join those of my colleagues who conclude that this Court should “accede” to such decisions. As the majority points out, the reasoning of the Courts of Appeals is not persuasive.1 Moreover, at stake in these cases is a principle which warrants more than this Court’s conclusion to merely accede to the decisions of those courts. The principle at stake is whether the Treasury, under the guise of interpreting a statute, may reverse a longstanding, reasonable provision of its regulations, where the reversal upsets a carefully crafted legislative compromise setting the effective level of taxation of an industry.2 I respectfully suggest that, by using an inquiry of limited scope to decide whether the regulation in issue is reasonable and by failing to consider the context in which the Treasury’s reversal of that regulation occurred, the opinions of the Courts of Appeals obscure the significance of that reversal and its impact on the congressional plan for the taxation of the industry. I respectfully disagree with the apparent view of the Courts of Appeals that it was inappropriate for this Court to engage in a “plenary review of the statute and legislative history to determine the appropriate meaning of the Code” in order to determine the reasonableness of the regulation in issue. See, e.g., Pacific First Fed. Sav. Bank v. Commissioner, supra. I remain convinced that such an inquiry is appropriate in order to afford taxpayers meaningful review of a challenged regulation. While the approach adopted by the Courts of Appeals may ease disposition of difficult cases, it does not always produce just results. As pointed out in our Court-reviewed opinion in Pacific First Fed. Sav. Bank v. Commissioner, 94 T.C. at 110-114, and subsequently in Judge Halpern’s concurring opinion in Georgia Fed. Bank v. Commissioner, 98 T.C. 105, 119-121 (1992), Congress reached a compromise in setting a level of taxation that it believed appropriate for the mutual savings bank industry, and must have based the deduction limitations imposed in 1969 upon a definition of taxable income that reflected the first ordering rule promulgated by the Treasury in section 1.593 — 6(b)(2)(iv), Income Tax Regs., T.D. 6728, 1964-1 C.B. 195, 202 (the old regulation). Whether or not Congress explicitly said that it was relying on the definition in the old regulation, such reliance is apparent from the process leading up to the adoption of the 1969 modifications to section 593 and Congress’ desire to raise the effective rate of tax imposed on mutual savings banks by only a certain amount. The old regulation reasonably interprets the statute, and no court has held to the contrary. Only the 1978 memorandum of the Assistant Secretary for Tax Policy discussing the reasons for the change in the old regulation suggests that the old regulation was incorrect. The 1978 memorandum, however, is a self-serving statement and lacks credibility given the Treasury’s history of attacking the percentage method and its hostility to this congressionally sanctioned tax break for the mutual savings bank industry. See Georgia Fed. Bank v. Commissioner, supra at 115-116. Rather than correcting an error in the old regulation, the modification adopted in 1978 (the new regulation) in effect achieves “what Congress has repeatedly denied the Treasury: a form of repeal of the percentage method.” Id. at 116. The majority therefore correctly expresses reservations about whether the 1978 memorandum should be accepted as persuasive reasoning for reversing the old regulation. Majority op. p. 396. Given that the new regulation did not correct an error in the old regulation,3 I do not think it is sufficient to simply consider whether the new regulation is also reasonable,4 especially where, as in the instant case, the old regulation put in place the framework for the interplay of the two sections of the Internal Revenue Code that Congress specifically amended in order to achieve the legislative compromise it reached in 1969. Given this background, I respectfully suggest that, in order to ensure that the intent of Congress is effectuated, it is incumbent upon the courts to carefully scrutinize the reasons offered by the Treasury for reversing the method by which the deduction for the addition to bad debt reserve is calculated. See Motor Vehicle Manufacturers Association v. State Farm Mut. Ins. Co., 463 U.S. 29, 48 (1983); Midtec Paper Corp. v. United States, 857 F.2d 1487, 1498 (D.C. Cir. 1988). I note that the Court of Appeals for the Third Circuit, to which this case is appealable absent stipulation to the contrary, has stated that “Sharp changes of agency course constitute ‘danger signals’ to which a reviewing court must be alert.” West v. Bowen, 879 F.2d 1122, 1127 (3d Cir. 1989). Inquiring into the basis for an agency’s action neither requires the courts to usurp the function of the Treasury to make choices among reasonable alternatives in interpreting statutes, nor contravenes the teachings of Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 863-864 (1984), which opinion gives an agency great leeway to change its regulations in light of experience or changed circumstances.5 The examination this Court undertook in Pacific First and Georgia Federal was necessary in order to ascertain whether the Treasury confined itself to interpreting the statutory scheme created by Congress, which is its proper role, or whether the Treasury intentionally took it upon itself to revise or add to the congressional enactment. A regulation that is not technically inconsistent with the statutory language cannot stand if it is fundamentally at odds with the manifest congressional design. United States v. Vogel Fertilizer Co., 455 U.S. 16, 26 (1982). Interpreting legislative intent requires more than a cursory reading of the legislative history to see whether Congress specifically mentioned the regulation in question. I agree with the majority’s suggestion that even the standards traditionally applied to review regulations support our approach in Pacific First and Georgia Federal (majority op. pp. 394-395), and that a reversal of an interpretation may be entitled to less deference than would otherwise be the case. (Majority op. pp. 395-396.) Under the principles of National Muffler Dealers Association v. United States, 440 U.S. 472, 477 (1979), where a regulation is not a substantially contemporaneous interpretation of a statute, but dates from a later period or repudiates an earlier interpretation, the manner in which that regulation evolved merits inquiry, as does the length of time the regulation has been in effect, the consistency of the agency’s interpretation, and the degree of scrutiny devoted to the interpretation by Congress. These factors we considered in our majority opinions in Pacific First and Georgia Federal. Even the Court of Appeals that reversed this Court in Peoples Fed. Sav. & Loan Association v. Commissioner, 948 F.2d 289 (6th Cir. 1991), revg. T.C. Memo. 1990-129 (granting a wide latitude of deference to the Treasury under the principles of Chevron U.S.A. v. Natural Resources Defense Council, 467 U.S. 837 (1984), and Rust v. Sullivan, 500 U.S. 173 (1991)), has recently expressed frustration with the standard to be used in testing agency interpretations of a statute. In Wolpaw v. Commissioner, 47 F.3d 787 (6th Cir. 1995), revg. and remanding T.C. Memo. 1993-322, the Sixth Circuit Court of Appeals began its inquiry into the Treasury’s interpretation of section 117 with the following statement: The degree of deference to be accorded an agency’s interpretation of a statute Congress has charged it with administering varies, depending on several factors, including the existence of a statute mandating a standard of review, the form and formality of the interpretation, and the consistency of the agency’s interpretation over time. * * * Concerning the difficulty courts have in applying the various pronouncements of the Supreme Court, the court commented as follows: “‘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.’” Id. In the instant case, the majority correctly points out that “Chevron has had a checkered career in the tax arena.” Majority op. p. 391. I believe that the traditional standard of review, utilizing the factors set forth in National Muffler, does not limit courts to merely considering whether Congress expressly approved the old regulation in deciding whether to sustain the new regulation. Rather, courts should conduct the type of inquiry that this Court performed in Pacific First and Georgia Federal.6 Otherwise, judicial review would be rendered an ineffective check on the Treasury’s ability to uproot settled law where it finds itself in disagreement with Congress on the tax benefits Congress has decided to confer on certain industries. Like the majority, majority op. pp. 395-396, I do not find persuasive the statements of the Courts of Appeals that the new regulation is a permissible interpretation of the statute because it followed a legislative trend of reducing the allowable deduction for the addition to bad debt reserve. Although Congress reduced the allowable deduction for the addition to bad debt reserve over time, it did so in a measured way, through the give and take of the legislative process. Congress did not delegate this function to the Department of the Treasury. The legislative trend identified by the Courts of Appeals should not be considered an open invitation by Congress to the Treasury to further pare back the allowable deduction through revisions to the manner in which it is to be calculated. As this Court described in Pacific First Fed. Sav. Bank v. Commissioner, 94 T.C. at 108-114, Congress decided, in successive enactments, upon the level of tax that was to be exacted from the mutual savings bank industry. Congress decided the manner in which the deduction for the addition to bad debt reserve was to be modified, and the Treasury should not be allowed to upset the legislative compromise by further limiting the deduction by means of reversing its longstanding reasonable regulations for the addition to bad debt reserve. Once the Treasury settled on a reasonable interpretation of the statute in 1964, it then became obligated to provide persuasive reasons for upsetting settled law, particularly in light of the intervening legislative compromise. I respectfully submit that consideration of the legislative history and of the facts and circumstances surrounding the adoption of the new regulation leads to the conclusion that the Treasury acted in an arbitrary manner in adopting the new regulation, which upset a carefully crafted compromise. In light of the Treasury’s failure to provide a persuasive rationale for reversal of the position embodied in the new regulation, I would hold, as this Court already has done in two Court-reviewed opinions, that the regulation is invalid. Swift and Laro, JJ., agree with this dissent.   It appears that the majority is subscribing to the proposition it quotes from Pacific First Fed. Sav. Bank v. Commissioner, 961 F.2d 800, 805 (9th Cir. 1992), revg. 94 T.C. 101 (1990), that “in the realm of national tax law, ‘it is more important that the applicable rule of law be settled than it be settled right.’” Majority op. p. 394.    This principle was discussed at length in Georgia Fed. Bank v. Commissioner, 98 T.C. 105 (1992) (Court reviewed), vacated and remanded by agreement of the parties (11th Cir., July 12, 1994).    I do not suggest that the Treasury should not be permitted to correct an error where its first interpretation is wrong. The instant case, however, does not present such a circumstance.    I remain committed to the proposition that the new regulation is not a reasonable interpretation of Congress’ intent for the reasons set forth in Pacific First Fed. Sav. Bank v. Commissioner, 94 T.C. 101 (1990), revd. 961 F.2d 800 (9th Cir. 1992).    I do not suggest that an agency should not be permitted to change course in light of administrative experience or changed circumstances. Contrary to the Seventh Circuit Court of Appeal’s suggestion in Bell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d 224 (7th Cir. 1994), revg. and remanding T.C. Memo. 1991-368,1 find no such experience or circumstances warranting a reversal of the old regulation. The only experience suggested by the Court of Appeals is the self-serving 1978 memorandum of the Assistant Secretary of the Treasury for Tax Policy which states that the old regulation is “patently wrong,” a conclusion that neither the Court of Appeals nor any other court has reached.    No Court of Appeals has specifically criticized or addressed this Court’s analysis in Georgia Federal.