Page 4 - Altera: Why the Government Can't Count on Chevron Step Two

COMMENTARY / SPECIAL REPORT
25 percent of its gross income by improperly over- stating its tax basis in reporting specific sales trans- actions.23
The 2010 regulation, reg. section 301.6501(e)- 1(a)(1)(iii), conflicted with the Supreme Court’s earlier decision in Colony,24 holding that an under- statement resulting from an overstated basis wasn’t omitted gross income under the predecessor to section 6501(e), which contained identical operative language. It was thus a fighting regulation that adopted the IRS’s litigating position in its challenge to tax shelters of that era.
In a 5-4 decision, the Supreme Court held that overstated basis doesn’t constitute an omission from gross income for purposes of the six-year statute of limitations, and the Court refused to defer to the Treasury regulation. In the majority’s view, Colony had already interpreted the statute, and there was no room for Treasury to adopt an alter- native construction that would be consistent with Colony.
Writing for a plurality in one section of his opinion, Justice Stephen G. Breyer said that the government had overlooked the reason why the Court in Brand X25 had held that a prior judicial construction, unless reflecting an unambiguous statute, doesn’t trump a different agency construc- tion of that statute. Quoting from Brand X, he explained that when a statute is unambiguous, there’s no gap for the agency to fill and there’s no delegation by Congress of gap-filling authority. However, citing Chevron, Breyer added that when the statute is ambiguous or silent, there is at least a presumption that Congress delegated that gap- filling authority. In this case, there was no gap for the regulation to fill, and Colony’s interpretation of an unambiguous statute was dispositive of the issue before the Court, according to the majority opinion.
3. King (2015). The Supreme Court sidestepped the Chevron doctrine in King,26 declining to apply it in determining the validity of reg. section 1.36B- 2(a)(1), a Treasury regulation that allows tax credits under section 36B for health insurance purchased through the federal exchange under the Affordable Care Act. Whether the ACA limited the credits to
23The taxpayer-plaintiffs in the refund suit had invested in a son-of-BOSS tax shelter that generated artificial losses by inflat- ing the investing partners’ basis in a partnership and short- selling Treasury bonds. See Notice 2000-44, 2000-2 C.B. 255; Clearmeadow Investments LLC v. United States, 87 Fed. Cl. 509 (2009); and Tigers Eye Trading LLC v. Commissioner, 138 T.C. 67 (2012) . See also reg. section 1.752-6 and reg. section 1.752-7.
24Colony Inc. v. Commissioner, 357 U.S. 28 (1958).
25Brand X, 545 U.S. 967.
26King, 135 S. Ct. 2480. See Ellen Aprill, ‘‘King v. Burwell and
Tax Court Review of Regulations,’’ 2015 Pepp. L. Rev. 6 (2015). 4
insurance purchased from exchanges established by the states was a question of ‘‘deep economic and political significance,’’ according to the Court, which proceeded to interpret the statutory lan- guage. Applying a Chevron step zero approach, the majority reasoned that Congress had not delegated to Treasury and the IRS the power to interpret the provision, which was central to the ACA’s statutory framework.27
C. State Farm
In State Farm, a pre-Chevron decision, the Su-
preme Court held that the National Highway Traffic Safety Administration acted arbitrarily and capri- ciously in revoking the requirement in motor ve- hicle safety standard 208 that new motor vehicles produced after September 1982 be equipped with passive restraints to protect the safety of the vehi- cle’s occupants in the event of a collision. The Court found that the agency failed to present an adequate basis and explanation for rescinding the passive restraint requirement.
The Court articulated the scope of review under the arbitrary and capricious standard:
The agency must examine the relevant data and articulate a satisfactory explanation for its action including a ‘‘rational connection be- tween the facts found and the choice made.’’ In reviewing that explanation, we must ‘‘con- sider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judg- ment.’’ Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not in- tended it to consider, entirely failed to con- sider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be as- cribed to a difference in view or the product of agency expertise.
The Tax Court in Altera said that Chevron step two incorporates the State Farm standard.
IV. Altera
A. Background
The taxpayer, Altera Corp., is the parent of Altera U.S., a Delaware corporation with its principal place of business in California. Altera U.S. simulta- neously entered into two agreements with its Cay- man Islands subsidiary, Altera International: a
27See City of Arlington v. FCC, 133 S. Ct. 1863 (2013); and Christine Kexel Chabot, ‘‘Selling Chevron,’’ 67 Admin. L. Rev. 481 (2015).
TAX NOTES, June 6, 2016