The Regulatory Authority of the Treasury Department to Index Capital Gains for Inflation: A Sequel

Article excerpt

INTRODUCTION
  I. SUMMARY OF 1992 ANALYSIS
     A. The Chevron Analytical Framework
     B. The Chevron "Step One" Analysis
        1. The Statutory Text and the Meaning of "Cost"
        2. The Legislative History
        3. Relevant Caselaw
     C. The Chevron "Step Two" Analysis
 II. DEVELOPMENTS SINCE THE 1992 ANALYSIS
     A. Chevron Applies to Treasury Interpretations of the Code:
        Mayo Foundation
     B. Developments Affecting Application of the Chevron Test
        1. The Meaning of Cost: Verizon Communications
        2. Legislative Developments
           a. 1993-1994
           b. 1995-1996
           c. 1997-1998
           d. 1999-2000
           e. 2000-Present
           f. Capital Gains "Preferences"
           g. Implications of Legislative Developments
       3. Judicial Decisions Construing the Code: Brand X
CONCLUSION

INTRODUCTION ***

The 1992 election witnessed the revival of one of the periodically recurring debates in the field of tax policy--whether the determination of taxable gain from the sale or exchange of a capital asset should be "indexed" to reflect the effect of inflation on the taxpayer's investment. What distinguished that debate from virtually all previous capital gains indexation debates was the overlay of a complex legal question on top of the usual economic and political considerations. Although the indexation debate previously focused almost exclusively on the wisdom of amending the Internal Revenue Code (the Code or I.R.C.) to require indexation, the 1992 debate introduced the legal issue of whether such a statutory amendment was even necessary. Could the Treasury Department (Treasury) simply adopt regulations allowing for capital gains indexation? Consideration of this legal issue obviously implicated intricate questions concerning the meaning of the Code's capital gains provisions and the deference to which any administrative reinterpretation of those provisions would be entitled in a court challenge.

During the summer of 1992, we were asked by the National Chamber Foundation, an affiliate of the United States Chamber of Commerce, to examine this legal issue. After conducting a comprehensive analysis of the Code and its legislative history, as well as of relevant principles of administrative law--with particular emphasis on the "Chevron doctrine"--we concluded that the Treasury would have the regulatory authority to index capital gains without an amendment to the Code. The principal foundation of our analysis was our conclusion that the term "cost" as used in the Code's capital gains provisions was ambiguous and was not plainly limited to historical cost--that is, the price originally paid for a capital asset. We also concluded that Congress's failure to enact various proposals that would have amended the Code to provide for indexation, as well as its enactment over the years of various other kinds of capital gains preferences, did not eliminate the ambiguity in the meaning of the pivotal term "cost" in the Code, nor did it otherwise foreclose the Treasury's ability to provide for indexation through the adoption of regulations. Our memorandum discussing the details of our legal analysis subsequently formed the basis of a law review article on the subject of administrative indexation of capital gains. (1) Though we direct the reader to the VTR article for the details of our comprehensive analysis, we provide a summary of that analysis in Part I of this Article.

We acknowledged in our 1992 analysis that the arguments against the Treasury's authority to reinterpret the Code to allow for indexation were substantial and that the legal question was a close and difficult one. As it turned out, the Department of Justice under the administration of President George H.W. Bush concluded that those arguments were not only substantial but insurmountable. In September 1992, the Office of Legal Counsel (OLC) prepared an opinion examining our analysis and concluding that the Code precludes administrative indexation (OLC opinion). …