Administrative Law - Chevron Deference - Federal Tax Court Holds Pre-Chevron Judicial Construction of Statute Precludes Subsequent Agency Interpretation If Prior Construction Was Premised on Legislative History

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ADMINISTRATIVE LAW--CHEVRON DEFERENCE--FEDERAL TAX COURT HOLDS PRE-CHEVRON JUDICIAL CONSTRUCTION OF STATUTE PRECLUDES SUBSEQUENT AGENCY INTERPRETATION IF PRIOR CONSTRUCTION WAS PREMISED ON LEGISLATIVE HISTORY.--Intermountain Insurance Service of Vail, LLC v. Commissioner, No. 25868-06, 2010 WL 1838297 (T.C. May 6, 2010).

For more than two decades after it was handed down, the Supreme Court's decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (1) stood in tension with the doctrine of stare decisis. (2) After all, Chevron granted greater deference to administrative agencies in the arena of statutory interpretation, presumably at the expense of the courts, (3) than had ever been seen in administrative law. (4) In 2005, the Supreme Court attempted to resolve this tension, ruling in National Cable & Telecommunications Ass'n v. Brand X Internet Services (5) that, in the event of conflict between a prior court and an administrative agency on the score of statutory interpretation, the agency's interpretation merits deference unless the prior court held that "its construction follow[ed] from the unambiguous terms of the statute." (6)

Recently, in Intermountain Insurance Service of Vail, LLC v. Commissioner, (7) the United States Tax Court applied Brand X to strike down an agency's proposed statutory interpretation because that interpretation conflicted with judicial precedent. (8) Intermountain framed important questions for future courts of appeals (9) regarding the application of Brand X to pre-Chevron Supreme Court decisions. Intermountain's approach to the Brand X inquiry, however, was seriously flawed. Instead of focusing its analysis on the holding of the prior court at issue, Intermountain considered what the court would have held had it decided the case after Chevron was handed down. In so doing, Intermountain ignored the specific mandate of Brand X, created an unpredictable framework for judicial review, and granted too much deference to judicial precedent. In place of its flawed approach, Intermountain should have considered whether the holding of the prior case necessarily relied on a finding of unambiguous statutory meaning. Such an inquiry would have focused on the prior court's actual holding, as Brand X intended.

In 1999, Intermountain Insurance Service of Vail, LLC (Intermountain) engaged in a series of transactions that culminated in the sale of business assets for nearly two million dollars. (10) Intermountain reported the sales price, along with a concurrent increase in partnership basis, (11) on a tax return filed September 15, 2000. (12)

On September 14, 2006, the Commissioner of Internal Revenue issued a final partnership administrative adjustment (13) (FPAA) with respect to Intermountain's 1999 tax year. (14) In response, Intermountain challenged the timeliness of the FPAA, claiming that the Commissioner was precluded from issuing the partnership adjustment by a general three-year statute of limitations for assessing tax. (15) The Commissioner acknowledged that the three-year statute of limitations had expired, but argued that the FPAA could still be issued under an extended six-year statute of limitations because Intermountain had overstated its partnership basis. (16) The parties soon began a dispute over whether an overstatement of partnership basis is an "omission from gross income" that triggers the six-year statute of limitations specified in 26 U.S.C. [section][section] 6229(c)(2) and 6501(e)(1)(A). (17)

In its initial ruling on the matter, Intermountain Insurance Service of Vail, LLC v. Commissioner (18) (Intermountain I), the Tax Court held that an overstatement of basis does not trigger the six-year statute of limitations. (19) Quoting its decision in Bakersfield Energy Partners, LP v. Commissioner, (20) the court noted that the extended period of limitations applies only "to situations where specific income receipts have been 'left out' in the computation of gross income. …