Tax Court (Judge Halpern) Discusses Chevron and Retroactivity Issues in Significant Opinion (2/2/22)

Caveat:  The Tax Court opinion was corrected on 2/8/22 (see TC here Dkt. 86 *).  There is no indication of the changes made in the opinion.  I have checked the quotes below against the corrected opinion; they do not appear to have been revised.  I don't know whether the changes will result in new posts to Casetext and Google Scholar.  I will check later and post updates if they are made to those services.  (I earlier sent a letter to the Tax Court Clerk suggesting that, when revising an opinion, the Court provide public notice of such revisions.  See My Suggestions to Tax Court on Procedure Related Matters (11/23/20), here (noting that the Supreme Court makes the revisions available).)

In TBL Licensing LLC v. Commissioner, 158 T.C. ___ No. 1 (1/31/21), TC here Dkt. 85 *, Casetext here, and GS here, the Court (Judge Halpern) determined that inter-company shuffling of assets among related U.S. and foreign entities constituted a reorganization in which a domestic entity made a taxable distribution of intangible assets to a foreign entity. The amount of the resulting increase in income is  $1,452,561,000. (Slip Op. 91.)  It is not clear whether that is just a timing difference; in any event, I don't propose to get into the nitty-gritty on the reorganization and resulting increase in income. Instead, I offer the case to discuss two procedural issues related to issues I have discussed before on this blog.

First, in broad strokes, the case involved the statute and regulations. In part relevant here, the regulations did not apply, so the Court resolved the relevant issue solely by interpreting the statute and applying the best interpretation. There is no Chevron issue there, and the IRS did not assert Chevron deference. But TBL apparently attempted to assert something sounding like Chevron into the analysis. The Court stated its confusion about that (Slip Op. 79-80):

            Petitioner suggests that respondent is to blame for the absence of a provision in the regulations that can be applied to petitioner's circumstances. The absence of an applicable regulatory provision, however, requires that we look to the statute alone to determine the tax consequences of petitioner's transaction. For the reasons explained supra part III, section 367(d)(2)(A)(ii)(II), interpreted in accordance with the legislative history, requires petitioner to recognize gain. The absence of a provision in the regulations providing otherwise is petitioner's problem — not respondent's.

            Because respondent's position is grounded in an interpretation of the applicable statutory provisions and not on any regulations, we do not understand petitioner's argument that respondent's "litigating position" is "impermissible" under Bowen v. Georgetown University Hospital, 488 U.S. 204 (1988). Bowen stands for the proposition that an agency's litigating position is not entitled to the same deference a court would give to a position adopted through notice and comment rulemaking. See id. at 212-13; see also Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). Respondent does not ask that we grant Chevron deference to the interpretation of the applicable statutes that he advances in this case.

Just a little background will be helpful. In Chevron analysis, when an interpretation potentially entitled to Chevron deference is involved, at Chevron Step Two, the agency interpretation can prevail if it is permissible (which means reasonable); if the interpretation is impermissible (unreasonable), the interpretation will not prevail and the Court is free to apply the best interpretation. I suppose that TBL's lawyers were trying to address the potential that the Court might get to Chevron Step Two even though, as presented by the Court, Chevron was not involved in the case, and the IRS never asserted Chevron. And the Court determined the best interpretation of the statute which defeated TBL's position.

Second, the Court addresses the retroactive effect of a relevant regulation. (Slip Op. 25 n. 10):

    n10 Petitioner has no cause for complaint about the retroactive effect of Treasury Regulation § 1.367(a)-1(f). Until a 1996 amendment of section 7805(b), regulations generally applied retroactively unless the Secretary of the Treasury exercised his discretion to apply them prospectively. As amended in 1996, section 7805(b) limits the extent to which regulations can apply retroactively. The amendment, however, applies only to regulations that relate to statutory provisions enacted on or after July 30, 1996. Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 1101(b), 110 Stat. 1452, 1469. While Congress has amended section 367(d) several times since July 30, 1996, those amendments have no apparent bearing on the issue before us. Therefore, it is not clear whether the 1996 amendment of section 7805(b) limits the extent to which Treasury Regulation § 1.367(a)-1(f) can be applied retroactively. Moreover, respondent's application of Treasury Regulation § 1.367(a)-1(f) to the transaction in issue would not violate section 7805(b) even if that provision, in its current form, were applicable. The statute allows regulations to apply retroactively back to "the date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register." § 7805(b)(1)(B).

This authority to adopt retroactive interpretive regulations for pre-1996 statutes was featured in United States v. Home Concrete & Supply, LLC, 566 U.S. 478 (2012) with none of the Justices indicating any problem with retroactive effect of the interpretation, but instead holding that the interpretation was foreclosed by an earlier Supreme Court decision. I discussed this retroactive authority for pre-1996 statute text in Regulations Interpreting Pre-1996 Code Provisions; Fixing Hewitt (1/6/22; 1/7/22), here.

 *    The Tax Court apparently does not have static links to opinions that do not time out. I am told that the work-around is to link the docket entries that have a static link, and then the opinion can be retrieved from the docket number. I am not sure why the Tax Court does not provide a static link to the opinion.