The Tax Court recently denied motions of the IRS to vacate and reconsider its prior decision in Intermountain Insurance Service of Vail LLC v. Commissioner, TC Memo 2009-195, in light of new Treasury regulations issued approximately one month after that case was decided. (For prior Tax Matters coverage, see “Application of Six-Year Statute of Limitations Denied Again,” Nov. 2009, page 70.) The court held that the regulations were invalid and were not entitled to deference. The Supreme Court (Colony Inc. v. Commissioner, 357 U.S. 28) had previously held that the disputed statutory provision was unambiguous, since its legislative history clearly indicated congressional intent—thus eliminating any need for a regulation, the Tax Court said.
When considering the validity of a Treasury regulation, a court can use the Chevron standard (Chevron USA Inc. v. Natural Res. Def. Council, 467 U.S. 837), which first asks whether the provision is unambiguous. If it is, then no regulation is required. However, if the law is ambiguous, the court will generally defer to the regulation unless it is not a reasonable interpretation of the law. On Sept. 1, 2009, the Tax Court in Intermountain Insurance Service of Vail, following its own precedent in Bakersfield Energy Partners LP v. Commissioner, 128 TC 207, aff’d 568 F.3d 767 (9th Cir., 2009), held that an overstatement of basis was not an omission of gross income that would trigger the six-year statute of limitations.
On Sept. 24, 2009, the Treasury Department issued temporary regulations that defined gross income from the disposition of property for the six-year test as the excess of the amount realized over its basis. The regulations were simultaneously issued as proposed regulations. The regulations applied “to taxable years with respect to which the applicable period for assessing tax did not expire before September 24, 2009.” The IRS requested that the Tax Court vacate its prior decision because the issuance of the temporary regulations was an unusual circumstance that would justify reconsideration.
The IRS argued that the temporary regulations were applicable to the taxpayer.
The court should revisit the case because, if the new regulations were applied to this case, the six-year statute of limitations period should be used, the IRS said. The majority rejected this logic as circular and stated the plain language of the regulations indicated the statute of limitations for the taxpayer had expired before Sept. 24, 2009. In addition, the court held that the regulations were invalid, since the Supreme Court in Colony had eliminated the need for Treasury Department regulations to interpret the disputed provisions.
In one of two separate opinions concurring with the result only, four judges said they would not have reconsidered the case. In the other, two judges said the regulations at issue were procedurally invalid because the Treasury Department did not observe notice and comment requirements.
Intermountain Insurance Service of Vail LLC v. Commissioner , 134 TC no. 11
By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin–Superior.
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