Tax Court Applies Chevron Analysis to Validate Regulation (9/14/12)

In Gaughf Properties, LP v. Commissioner, 139 T.C. No. 7 (2012), here, the Tax Court (Judge Goeke) held that the taxpayers were subject to an extended period of time for a TEFRA partnership adjustment because they, as indirect partners not listed on the partnership return, had failed to "furnish" the IRS proper notice of their status as indirect partners.  See Section 6229(e), here. The Regulations stated that the taxpayer "furnish" the information by filing.  The taxpayer did not file the required information.  However, the taxpayer argued that taxpayers' status as indirect partners was otherwise known to the IRS from other sources and therefore that the IRS should not be allowed the extended period to assess.  The Tax Court rejected the taxpayers' claims, holding that the indirect partner (taxpayers here) must "furnish" the information in the manner prescribed in the Regulations.  Regs. Section 301.6223(c)-1T provides that the information is "furnished" by filing the information in a prescribed manner.  The Tax Court held that equating "furnishing" with "filing" was a proper exercise of the authority to interpret an ambiguous statutory term under Chevron.  The Court's Chevron analysis follows (some footnotes omitted):

Petitioner's final argument regarding section 6229(e) is that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, which incorporates section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., supra, regarding the procedure for furnishing additional information for purposes of section 6229(e), is invalid. Petitioner argues that while section 6229(e) merely requires information identifying a partner to be "furnished" to the Commissioner, section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., supra, restricts the plain meaning of section 6229(e) by requiring that identifying information be "filed" with the Commissioner. Petitioner also points out that section 6229(e) contains no "regulation-enabling language". We find that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, is a valid regulation. 

We first address petitioner's point regarding the lack of "regulation-enabling language" in section 6229(e). As the Supreme Court has noted, section 7805(a) provides the Commissioner with "explicit authorization to 'prescribe all needful rules and regulations for the enforcement' of the Internal Revenue Code." Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. ___, ___, 131 S. Ct. 704, 714 (2011). Section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, was issued pursuant to the authority section 7805 provides to the Commissioner. 52 Fed. Reg. 6779, 6780 (Mar. 5, 1987). Secondary authority for issuance of the regulation is found in section 6230(k), which provides: "The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subchapter"; i.e., subchapter C of chapter 63, which contains sections 6221 through 6234. Id. We thus find petitioner's argument on this point has no merit.

We proceed to petitioner's primary argument. We must follow a regulation, unless we hold it to be invalid under the principles of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Under Chevron, we first ask whether Congress has addressed the precise question at issue. Id. at 842. If the statute is ambiguous, we next ask whether the agency's chosen interpretation is a "reasonable interpretation" of the statute. Id. at 844. We may not find a regulation to be invalid unless it is "'arbitrary or capricious in substance, or manifestly contrary to the statute.'" Mayo Found., 562 U.S. at ___, 131 S. Ct. at 711 (quoting Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 242 (2004)). 

The first issue is whether section 6229(e) is "silent or ambiguous" on the issue in question such that the agency has room to interpret the statute. Chevron, 467 U.S. at 843. While we begin our analysis with the statute's text, we "must examine the meaning of certain words or phrases in context and also 'exhaust the traditional tools of statutory construction, including examining the statute's legislative history to shed new light on congressional intent, notwithstanding statutory language that appears superficially clear.'" Sierra Club v. EPA, 551 F.3d 1019, 1027 (D.C. Cir. 2008) (quoting Am. Bankers Ass'n v. Nat'l Credit Union Admin., 271 F.3d 262, 267 (D.C. Cir. 2001)). Thus, the question we must answer is whether Congress' intent is clear with respect to the use of the term "furnished to the Secretary". Petitioner argues that the word "furnish" has a meaning distinct from and broader than the word "file" and that Congress clearly intended the broader meaning to apply to identifying information supplied to the Commissioner. In support of its argument, petitioner claims that "One may assume that Congress knows how to use the word 'file' when it means the word 'file'." 

We turn to the statute itself. Section 6229(e) alone uses the word "furnish" n33 twice and does not use the word "file". n34 Aside from section 6229(e), section 6229 uses the word "file" four times and does not use the word "furnish". Although those facts offer some slight support for petitioner's position, considering the definitions of the words "furnish" and "file", we believe that the intent of Congress was not clear with respect to the use of the term "furnished to the Secretary" in section 6229(e).
  n33 For the sake of simplicity, we count all variations on the same word.
  n34 However, sec. 6229(e) does reference sec. 6222(b), which uses the word "file" multiple times. 

Merriam-Webster's Collegiate Dictionary 473 (10th ed. 2002) includes the following definitions for "furnish": "1: to provide with what is needed; esp: to equip with furniture [and] 2: SUPPLY, GIVE". As this Court has previously noted: "the longstanding definition of the word 'filed' as used in Federal statutes is 'delivered'." Hotel Equities Corp. v. Commissioner, 65 T.C. 528, 531 (1975), aff'd, 546 F.2d 725 (7th Cir. 1976). Considering these definitions, we find that the words "furnish" and "file" are sufficiently similar that (barring any further clarification provided in the language or legislative history of a statute) the intent of Congress does not clearly prohibit an agency from promulgating regulations which require information to be filed where the relevant statute provides that the information must be "furnished". The legislative history is of no aid on this issue. The House, Senate, and House conference reports pertaining to the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648, which enacted section 6229(e), as well as the reports pertaining to the amendments to section 6229, contain no discussion of section 6229(e). In addition, section 6229(e) has not been amended since its enactment. Following this logic, section 6229(e) does not clearly bar the Secretary from promulgating section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, which requires that identifying information be filed with the Commissioner. 

The second issue is whether the regulation is "based on a permissible construction of the statute." Chevron, 467 U.S. at 843. "If the Secretary's construction is reasonable, Chevron requires the Court to accept that construction, even if the Secretary's 'reading differs from what the court believes is the best statutory interpretation.'" Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67, 124-125 (2012) (quoting Nat'l Cable & Telecomms. Ass'n v. Brand X, 545 U.S. 967, 980 (2005)). Given the similarity between the definitions of the words "furnish" and "file" previously discussed, we find that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, is based on a permissible construction of section 6229(e).
We find that section 301.6229(e)-1T, Temporary Proced. & Admin. Regs., supra, satisfies both prongs of the Chevron analysis. It is thus a valid regulation.

Judge Goeke finds that Congress' infrequent use of the word "furnish" in the Code is not sufficient to provide a clear answer as to whether "furnish" does or does not mean "file," a conclusion that is necessary for Chevron's second step to be reached.  In the process, Judge Goeke resorts to the legislative history but finds it of no aid, so the first step analysis permits the IRS some leeway in defining the word "furnish."  Judge Goeke than moves quickly through his Chevron second step analysis to conclude that the regulation's equation of "furnish" with "file" is a permissible interpretation of the statute.  Judge Goeke does not provide any discussion of why it is a permissible interpretation, apparently believing it self evident from his Chevron step one discussion.

Judge Goeke's opinion breaks no new ground in Chevron analysis, so I will not make changes to the Federal Tax Procedure book.  I blog the case simply because it offers a straight-forward application of the Chevron analysis, that, hopefully by some (but not too much) repetition, readers will be able to understand that two step inquiry and where the soft spots may be in its application in any given case.  Here, the use of the "file" concept to interpret "furnish" is fairly straight-forward.  In other contexts, the ambiguity or room for interpretation may not be as evident.