Intermountain Insurance Service of Vail v. Commissioner of Internal Revenue Service

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 5, 2011 Decided June 21, 2011

No. 10-1204

INTERMOUNTAIN INSURANCE SERVICE OF VAIL, LIMITED
LIABILITY COMPANY AND THOMAS A. DAVIES, TAX MATTERS
PARTNER,
APPELLEES

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLANT

Appeal from the United States Tax Court

Gilbert S. Rothenberg, Acting Deputy Assistant Attorney
General, U.S. Department of Justice, argued the cause for
appellant. With him on the briefs were Michael J. Haungs and
Joan I. Oppenheimer, Attorneys.

Brian F. Huebsch argued the cause for appellees. With
him on the brief was Steven R. Anderson.

Roger J. Jones, Andrew R. Roberson, and Kim Marie
Boylan were on the brief for amicus curiae Bausch & Lomb
Incorporated in support of appellees.
 2
Before: SENTELLE, Chief Judge, TATEL, Circuit Judge,
and RANDOLPH, Senior Circuit Judge.

Opinion for the court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: The Commissioner of Internal
Revenue and Intermountain Insurance Service of Vail
disagree about Intermountain’s 1999 gross income to the tune
of approximately $2 million, a disagreement arising from
Intermountain’s sale of assets and centering primarily on the
Commissioner’s conclusion that Intermountain inflated its
basis in those assets. But deciding whether Intermountain
inflated its basis must wait for another day because we must
first answer an antecedent question: did the Commissioner
wait too long to adjust Intermountain’s gross income?
Although the Commissioner usually must make such an
adjustment within three years, sections 6501(e)(1)(A) and
6229(c)(2) of the Internal Revenue Code give the
Commissioner up to six years if the taxpayer (or partnership)
“omits from gross income an amount properly includible
therein which is in excess of 25 percent of the amount of
gross income stated in the return.” (emphasis added). Because
in this case the Commissioner waited nearly six years after
Intermountain filed its 1999 tax return, the adjustment was
timely only if a basis overstatement can result in an “omission
from gross income” for purposes of these two provisions. Id.
Believing it does not, the Tax Court granted summary
judgment to Intermountain. For the reasons set forth in this
opinion, we reverse.

I.
The key tax concept at issue in this case is “basis.” Basis
refers to a taxpayer’s capital stake in an item of property—
generally the amount the taxpayer paid to obtain it, as
adjusted by various other factors. 26 U.S.C. § 1012. When a
 3
taxpayer sells property, he realizes gain from that sale, and
that gain contributes to gross income. Id. § 61(a)(3). But the
taxpayer’s gain from the property sale is not the sale price (or
in technical terms, the “amount realized”) but rather the sale
price minus basis. Id. § 1001. Given the role basis plays in
calculating gross income, a higher basis translates into a lower
gross income. In the real world, of course, people generally
prefer a higher gross income. But when dealing with the tax
collector, lower gross income means a smaller tax bill.
Taxpayers, therefore, prefer a higher basis.

The question this case presents is whether a taxpayer who
overstates basis in sold property and therefore understates
gross income triggers the extended statute of limitations
periods. (For the sake of brevity, we will sometimes refer to
the issue as whether a basis overstatement constitutes an
omission from gross income under the relevant provisions.)
This issue “arises in the context of the now infamous Son of
BOSS tax shelter,” which shields income from taxation by
artificially inflating basis. Appellant’s Br. 4 (internal
quotation marks and citations omitted). As amicus Bausch &
Lomb accurately observes, however, our resolution of this
case will “apply equally to all taxpayers . . . without regard to
the nature of the underlying transaction.” Amicus’s Br. 7; see
also Wilmington Partners v. Comm’r, No. 10-4183 (2d Cir.
filed Oct. 13, 2010). Conscious of that, and because we agree
with the Tax Court that “[t]he details of the transactions are
largely irrelevant to the issues we face today,” we shall refer
to those details only to the extent necessary to explain our
disposition of this case. Intermountain Ins. Serv. of Vail,
L.L.C. v. Comm’r, 134 T.C. 211, 212 (2010) (“Intermountain
II”).

The Commissioner accuses Intermountain Insurance
Service of Vail of using a Son of BOSS tax shelter to avoid
 4
taxes on approximately $2 million of income. Intermountain
realized that income on August 1, 1999 when it sold its assets
for $1,918,844. On its 1999 Tax Return, filed on September
15, 2000, Intermountain reported a loss from this sale of
$11,420, an amount it calculated by subtracting its purported
basis in the sold assets ($2,061,808) from the sale proceeds
($1,918,844) and the recaptured depreciation ($131,544).
Believing Intermountain had artificially inflated its basis in
those assets, thus converting a substantial gain into a loss, the
IRS mailed Intermountain a Final Partnership Administrative
Adjustment (abbreviated FPAA and pronounced “F-Paw” in
tax-speak) on September 14, 2006, nearly six years after
Intermountain had filed its 1999 Tax Return. The FPAA
concluded that certain Intermountain transactions “were a
sham, lacked economic substance and . . . had a principal
purpose of . . . [reducing] substantially the present value of
. . . [Intermountain’s] partners’ aggregate federal tax
liability.” Id. at 4 (quoting the FPAA) (alterations in the
original). As a result, the FPAA adjusted Intermountain’s
basis to $0.

Intermountain petitioned the Tax Court and moved for
summary judgment, arguing that the FPAA was untimely
because the IRS mailed it after the expiration of the standard
three year statute of limitations provided for in 26 U.S.C.
§§ 6501(a) and 6229(a) (2000). Insisting that the FPAA was
in fact timely, the Commissioner contended that
Intermountain’s return triggered the extended six year
limitations period, available in the case of any taxpayer, 26
U.S.C. § 6501(e)(1)(A) (2000), or any partnership, 26 U.S.C.
§ 6229(c)(2) (2000), who “omits from gross income an
amount properly includible therein which is in excess of 25
percent of the amount of gross income stated in the return.”
(emphasis added). The alleged omissions to which the
Commissioner pointed were almost all overstatements of
 5
basis. The key question for the Tax Court, then, was whether
such overstatements qualify as omissions from gross income
under sections 6501(e)(1)(A) and 6229(c)(2) and thus trigger
the six year limitations period. Contending they do not,
Intermountain relied on an earlier tax court decision,
Bakersfield Energy Partners v. Commissioner, 128 T.C. 207
(2007), aff’d, 568 F.3d 767 (9th Cir. 2009), which had applied
the Supreme Court’s decision in Colony, Inc. v.
Commissioner, 357 U.S. 28 (1958). In Colony, the meaning of
which is central to this case, the Supreme Court interpreted
“omits from gross income” in section 6501(e)(1)(A)’s
predecessor to exclude basis overstatements. Id. The Tax
Court agreed with Intermountain that Colony applies to
sections 6501(e)(1)(A) and 6229(c)(2) and that basis
overstatements are not “omissions from gross income.”
Intermountain Ins. Serv. of Vail, L.L.C.. v. Comm’r, 98
T.C.M. (CCH) 144, 2009 WL 2762360 (2009)
(“Intermountain I”). Accordingly, the court granted
Intermountain summary judgment. Id.

Shortly after the Tax Court’s grant of summary
judgment—and implicitly contradicting that decision—the
Internal Revenue Service issued temporary regulations that
interpret the phrase “omits from gross income” in sections
6501(e)(1)(A) and 6229(c)(2) to include basis overstatements
outside the trade or business context. 26 C.F.R.
§§ 301.6501(e)-1T; 301.6229(c)(2)-1T (2010). The Service
reasoned that because I.R.C. section 61(a)’s standard
definition of “gross income” includes “gains derived from
dealings in property,” 26 U.S.C. § 61(a)(3), and because such
gains are ordinarily calculated by subtracting basis from the
amount realized, id. § 1001, “outside the context of a trade or
business, any basis overstatement that leads to an
understatement of gross income under section 61(a)
constitutes an omission from gross income for purposes of
 6
sections 6501(e)(1)(A) and 6229(c)(2).” Definition of
Omission from Gross Income, T.D. 9466, 74 Fed. Reg.
49,321, 49,321 (Sept. 28, 2009). As for Colony, the Service
concluded that it applies only to section 6501(e)(1)(A)’s
predecessor, pointing out that Congress had enacted section
6501(e)(1)(A) four years before the Supreme Court decided
Colony and had, at that time, added an amendment (limited to
the trade or business context) designed to address the very
same issue later addressed in Colony. Id. Relying on those
temporary regulations, the Commissioner moved the Tax
Court for reconsideration and to vacate its grant of summary
judgment. Denying that motion, the Tax Court found the
temporary regulations inapplicable to Intermountain because
the standard three year statute of limitations had expired prior
to September 24, 2009, the temporary regulations’
applicability date. Intermountain II, 134 T.C. at 218–20. The
Tax Court went on to hold that even assuming the regulations
applied, because Colony “ ‘unambiguously forecloses the
agency’s interpretation’ of sections 6229(c)(2) and
6501(e)(1)(A),” that decision “displaces [the Commissioner’s]
temporary regulations.” Id. at 224 (quoting Nat’l Cable &
Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967,
983 (2005)). For exactly the same reasons, the Tax Court also
granted summary judgment to another petitioner, UTAM.
UTAM, Ltd. v. Comm’r, 98 T.C.M. (CCH) 422, 2009 WL
3739456 (2009).

The Commissioner has appealed the Tax Court decisions
in both cases, and because they raise many of the same issues,
we scheduled oral argument for both on the same day before
the same panel. Although formally resolving only
Intermountain’s case here, we also address UTAM’s
arguments about whether a basis overstatement constitutes an
omission from gross income. In a separate opinion also
 7
released today, we address issues unique to that case. UTAM,
Ltd. v. Comm’r, No. 10-1262, (D.C. Cir. June 21, 2011).

II.
Determining whether basis overstatements constitute
omissions from gross income and thus trigger the extended
statute of limitations has long provoked debate, the history of
which is critical to understanding this case. Congress first
established the applicable extended statute of limitations in
1934 when it added section 275(c) to the tax code. See
Revenue Act of 1934, ch. 277, 48 Stat. 680, 745, § 275(c)
(codified at 26 U.S.C. § 275(c) (1934)). Section 275(c)
lengthened the standard three year period, 26 U.S.C. § 275(a)
(1934), to five years for omissions from gross income,
providing as follows:

Omission from gross income

If the taxpayer omits from gross income an
amount properly includible therein which is in
excess of 25 per centum of the amount of gross
income stated in the return, the tax may be
assessed, or a proceeding in court for the
collection of such tax may be begun without
assessment, at any time within 5 years after the
return was filed.

Id.

In the 1940s and 1950s, the courts of appeals divided
over how to interpret section 275(c). The Sixth Circuit held
that a basis overstatement qualifies as an omission from gross
income, thus triggering the extended period. See, e.g., Reis v.
Comm’r, 142 F.2d 900, 902–03 (6th Cir. 1944). The Tax
Court interpreted “omits from gross income” similarly. See,
 8
e.g., Estate of Gibbs v. Comm’r, 21 T.C. 443 (1954); Am.
Liberty Oil Co. v. Comm’r, 1 T.C. 386 (1942). But the Third
Circuit reached the opposite conclusion in Uptegrove Lumber
Co. v. Commissioner, 204 F.2d 570 (3d Cir. 1953). The
taxpayer in that case, a manufacturing corporation, had
accurately reported gross sales, but had then mistakenly
calculated profits by subtracting from the gross sales figure an
inflated amount for the cost of goods sold. Uptegrove Lumber
Co., 204 F.2d at 571. Although recognizing “real ambiguity”
in the statute, the Third Circuit nonetheless concluded based
on section 275(c)’s legislative history that a taxpayer omits an
amount from gross income only when the taxpayer fails to
report an item of gross sales, not when the taxpayer overstates
the cost of that item and thus understates gross income. Id. at
571–73.

One year after Uptegrove Lumber, in 1954, Congress,
apparently responding to the circuit split, added two new
subsections to section 275(c) as part of a major recodification
of the 1939 tax code. Internal Revenue Code of 1954, 68 Stat.
730, Pub. L. 83-591 (Aug. 16, 1954). In doing so, Congress
also renumbered section 275 as section 6501. Id. The
amended text (as relevant to this case) reads:

Omission from gross income. . . .

If the taxpayer omits from gross income an
amount properly includible therein which is in
excess of 25 percent of the amount of gross
income stated in the return, the tax may be
assessed, or a proceeding in court for the
collection of such tax may be begun without
assessment, at any time within 6 years after the
return was filed. For the purposes of this
subparagraph—
 9
(i) In the case of a trade or business,
the term “gross income” means the
total of the amounts received or
accrued from the sale of goods or
services (if such amounts are
required to be shown on the return)
prior to diminution by the cost of
such sales or services; and

(ii) In determining the amount omitted
from gross income, there shall not
be taken into account any amount
which is omitted from gross
income stated in the return if such
amount is disclosed in the return,
or in a statement attached to the
return, in a manner adequate to
apprise the Secretary of the nature
and amount of such item.

26 U.S.C. § 6501(e)(1)(A) (1954). Notably, new
subsection (i) substantially tracks Uptegrove Lumber’s
holding by excluding basis overstatements from the category
of omissions from gross income. The amendment, however,
used a different mechanism to achieve that result. The Third
Circuit had interpreted the phrase “omits from gross income”
to exclude basis overstatements, but Congress literally took
basis out of section 6501(e)(1)(A)’s equation, redefining
“gross income” to mean gross receipts rather than gross
receipts minus the cost of goods sold. One other difference is
particularly important. Although Uptegrove Lumber involved
a manufacturing corporation, its reasoning is not limited to
that context. By contrast, and of critical significance to this
case, subsection (i) applies only “[i]n the case of a trade or
 10
business.” Finally, section 6501(e)(1)(A) lengthened the
extended statute of limitations from five to six years.

In a letter to the Senate Finance Committee, attorneys
supporting the Third Circuit’s approach stated their “belie[f]
that sub[section] (i) . . . w[as] proposed to reflect the rule of
reason announced by cases like Uptegrove Lumber Company
v. Commissioner.” An Act to Revise the Internal Revenue
Laws of the United States: Hearing on H.R. 8300 Before the
S. Comm. on Finance, 83d Cong. 984–85 (1954) (letter from
Harry N. Wyatt, D’Ancona, Pflaum, Wyatt & Riskind) (added
to the hearing record at the direction of the Committee
Chairman, id. at 961) (“Wyatt Letter”). Worried that the new
provisions would not apply to open tax years governed by the
pre-1954 tax code, they asked the Committee to make the new
subsections retroactive and to indicate that the amendments
merely clarified section 275(c). Id. But to no avail—the
House and Senate Reports characterized subsections (i)
and (ii) as “changes from existing law,” and Congress
nowhere indicated that section 6501(e)(1)(A) would apply
retroactively. H.R. Rep. No. 83-1337, at 503 (1954), reprinted
in 1954 U.S.C.C.A.N. 4017, 4562; S. Rep. No. 83-1622, at
558 (1954), reprinted in 1954 U.S.C.C.A.N. 4621, 5233.

Left unresolved, therefore, was which interpretation—the
Third Circuit’s or the Sixth Circuit and the Tax Court’s—
applied to section 275(c) of the 1939 Code. Over the next
several years, other circuits embraced the Third Circuit’s
approach, but the Sixth Circuit stuck with its earlier rule.
Compare, e.g., Davis v. Hightower, 230 F.2d 549 (5th Cir.
1956) (an overstatement of basis is not an omission from
gross income), with Colony, Inc. v. Comm’r, 244 F.2d 75 (6th
Cir. 1957) (an overstatement of basis is an omission from
gross income), rev’d, 357 U.S. 28 (1958). In light of this
 11
continued circuit split, the Supreme Court granted certiorari in
Colony.

Starting with section 275(c)’s text, the Supreme Court
explained that “[a]lthough we are inclined to think that the
statute on its face lends itself more plausibly to the taxpayer’s
interpretation”—i.e., that basis overstatements are not
omissions from gross income—“it cannot be said that the
language is unambiguous.” Colony, Inc., 357 U.S. at 33. The
Court therefore looked to section 275(c)’s legislative history,
where it found “persuasive evidence” that Congress, when
adding section 275(c) in 1934, never intended it to apply to
basis overstatements. Id. Relying on these textual and
legislative sources, the Court reasoned that “in enacting
s[ection] 275(c) Congress manifested no broader purpose than
to give the Commissioner an additional two years to
investigate tax returns in cases where . . . the Commissioner is
at a special disadvantage in detecting errors [because] the
return on its face provides no clue to the existence of the
omitted item.” Id. at 36. Believing that “the Commissioner is
at no such disadvantage” when a taxpayer fully reports gross
receipts but inflates the costs associated with those receipts,
the Court concluded that basis overstatements fell beyond
section 275(c)’s scope. Id. at 36–37. Finally, the Court
buttressed its construction of section 275(c) by comparing it
to newly enacted section 6501(e)(1)(A) in the 1954 Code.
“[W]ithout doing more than noting the speculative debate
between the parties as to whether Congress [in 1954]
manifested an intention to clarify” section 275(c)’s meaning,
as the taxpayer had argued, “or to change” that meaning, as
the Commissioner had argued, the Court observed: “the
conclusion we reach is in harmony with the unambiguous
language of § 6501(e)(1)(A) of the Internal Revenue Code of
1954.” Id. at 37.
 12
Colony thus closed the first round in the debate over
whether a basis overstatement counts as an omission from
gross income, that question having been “resolved for the
future” (at least in the trade or business context) by Congress
when it enacted section 6501(e)(1)(A) and “for earlier taxable
years” (seemingly for all taxpayers) by Colony itself. Id. at
32. Between 1954 and 2010, Congress reenacted section
6501(e)(1)(A) repeatedly and without change. See, e.g., Tax
Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085
(1986). In addition, as part of the Tax Equity and Fiscal
Responsibility Act of 1982, Congress added section
6229(c)(2) to create an extended statute of limitations period
for omissions from gross income appearing (or rather, not
appearing) on partnership returns. Pub. L. No. 97-248, § 402,
96 Stat. 324, 659 (1982). That new section tracks section
6501(e)(1)(A)’s language but without subsections (i) or (ii):

Substantial omission of income.—If any
partnership omits from gross income an
amount properly includible therein which is in
excess of 25 percent of the amount of gross
income stated in its return, subsection (a) shall
be applied by substituting ‘6 years’ for ‘3
years’.

26 U.S.C. § 6229(c)(2) (1982). At oral argument,
Intermountain suggested that only section 6229(c)(2), not also
section 6501(e)(1)(A), applies to this case. Oral Arg. Tr.
15:13–16:01. But Intermountain never made this argument in
its brief nor has it ever argued, not in the tax court and not on
appeal, that the two sections have different meanings outside
the trade or business context. Intermountain II, 134 T.C. at
212 n.2. Accordingly, we treat as forfeited any argument that
section 6501(e)(1)(A) and its implementing regulation have
no applicability to this case. See Potter v. District of
 13
Columbia, 558 F.3d 542, 550 (D.C. Cir. 2009) (argument
raised for first time on appeal is forfeited); Ark Las Vegas
Rest. Corp. v. NLRB, 334 F.3d 99, 108 n. 4 (D.C. Cir. 2003)
(argument raised for first time at oral argument is forfeited).
Similarly treating as forfeited any argument that the two
sections might have different meanings outside the trade or
business context, we shall focus our analysis on the earlier
enacted section 6501(e)(1)(A).

All of this brings us nearly to the present. The latest
round in the debate over whether a basis overstatement
constitutes an omission from gross income has arisen in the
last several years, largely in the context of entities, such as
Intermountain, that the Commissioner believes took
advantage of Son of BOSS tax shelters. See, e.g., Bakersfield
Energy Partners v. Comm’r, 568 F.3d 767 (9th Cir. 2009),
aff’g 128 T.C. 207 (2007); Salman Ranch Ltd. v. United
States, 573 F.3d 1362 (Fed. Cir. 2009) (“Salman Ranch I”).
But see Wilmington Partners v. Comm’r, No. 10-4183 (case
involving whether basis overstatement triggers extended
limitations period but no Son of Boss tax shelter allegation).
Because all agree that subsection (i)’s redefinition of gross
income unequivocally answers this question “in the case of a
trade or business,” this debate centers entirely on entities,
such as Intermountain (and UTAM), who operate outside that
context.

In several such cases, including this one, the Tax Court
concluded that Colony controls this latest debate. See
Intermountain I, 98 T.C.M. (CCH) 144; see also Bakersfield,
128 T.C. 207. Although some district courts had held
otherwise, by the time the Tax Court granted Intermountain’s
motion for summary judgment, the Ninth and Federal Circuits
had agreed with it. Compare Burks v. United States, No. 3:06-
cv-1747-N, 2009 WL 2600358 (N.D. Tex. June 13, 2008)
 14
(basis overstatement is an omission from gross income),
rev’d, 633 F.3d 347 (5th Cir. 2011), and Home Concrete &
Supply, L.L.C. v. United States, 599 F. Supp. 2d 678
(E.D.N.C. 2008) (same), rev’d, 634 F.3d 249 (4th Cir. 2011),
with Salman Ranch I, 573 F.3d 1362 (basis overstatement is
not an omission from gross income), and Bakersfield, 568
F.3d 767 (9th Cir. 2009) (same).

Disagreeing with those circuits, the Commissioner issued
the temporary regulations, described supra at 5–6, that
interpreted sections 6501(e)(1)(A) and 6229(c)(2) to mean
that outside the trade or business context an overstatement of
basis constitutes an omission from gross income, thus
triggering the extended six year statute of limitations.
Simultaneously, the Commissioner issued proposed final
regulations identical to the temporary regulations. Notice of
Proposed Rulemaking, Definition of Omission from Gross
Income, 74 Fed. Reg. 49,354 (Sept. 28, 2009). Approximately
a year later, and after soliciting comments, the Commissioner
withdrew the temporary regulations and replaced them with
largely identical final regulations. See 26 C.F.R.
§§ 301.6501(e)-1; 301.6229(c)(2)-1; see also Definition of
Omission from Gross Income, T.D. 9511, 75 Fed. Reg.
78,897 (Dec. 17, 2010). The Commissioner now contends that
these regulations are entitled to Chevron deference and so
control the question in this case.

Since the Commissioner issued the final regulations,
several of our sister circuits have weighed in on the basis
overstatement debate. The Fourth and Fifth Circuits have now
joined the Ninth and Federal Circuits in holding that Colony’s
interpretation of section 275(c) applies to sections
6501(e)(1)(A) and 6229(c)(2). See Home Concrete & Supply,
L.L.C. v. United States, 634 F.3d 249, 255 (4th Cir. 2011);
Burks v. United States, 633 F.3d 347, 352–59 (5th Cir. 2011).
 15
The Fourth and Fifth Circuits also rejected the
Commissioner’s reliance on the final regulations. Home
Concrete & Supply, 634 F.3d at 255–58; Burks, 633 F.3d at
359–61. By contrast, the Seventh Circuit concluded that
Colony does not control and that the Commissioner’s
interpretation of sections 6501(e)(1)(A) and 6229(c)(2) so
aligns with Congress’s clear intent that the Commissioner had
no need even to rely on the regulations. Beard v. Comm’r, 633
F.3d 616 (7th Cir. 2011). Finally, the Federal Circuit, which
had previously found Colony controlling in the absence of
IRS regulations, held that because that decision provides only
the best, but not the exclusive, construction of the phrase
“omits from gross income,” the regulations displaced Colony.
See Grapevine Imps., Ltd. v. United States, 636 F.3d 1368
(Fed. Cir. 2011) (applying Brand X, 545 U.S. 967); see also
Salman Ranch, Ltd. v. Comm’r, __ F.3d __, 2011 WL
2120044 (10th Cir. 2011) (“Salman Ranch II”) (same). In
considering this case, we have taken due account of our sister
circuits’ analyses.

In addition, in 2010 Congress amended sections
6501(e)(1)(A) and 6229(c)(2). See Hiring Incentives to
Restore Employment Act, Pub. L. No. 111-147, 124 Stat. 71,
112. In this opinion, we interpret the version of those sections
applicable to 1999, the tax year at issue in this case. See 26
U.S.C. §§ 6501(e)(1)(A), 6229(c)(2) (2000).

III.
As the Supreme Court just recently made clear, courts
assessing Treasury regulations that interpret the tax code, as
we do here, must apply the two-step framework of Chevron,
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842–43 (1984). See Mayo Found. for Med. Educ. & Research
v. United States, __ U.S. __, 131 S. Ct. 704, 713–14 (2011).
Employing “traditional tools of statutory construction,”
 16
Chevron, 467 U.S. at 843 n.9, we begin our Chevron analysis
by “determin[ing] whether Congress has unambiguously
foreclosed the agency’s statutory interpretation.” Vill. of
Barrington v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C.
Cir. 2011) (internal quotation marks omitted). If it has not,
then at Chevron’s second step, we “ask[] whether the
[Commissioner’s] rule is a ‘reasonable interpretation’ of the
enacted text.” Mayo Found., 131 S. Ct. at 714 (quoting
Chevron, 467 U.S. at 844).

Although we ordinarily begin a Chevron step one inquiry
with the statute’s text, given the peculiar circumstances of this
case, we must first assess Colony’s relevance to the question
presented. Indeed, Intermountain’s argument largely “starts
and ends” with Colony. Oral Arg. Tr. 15:07–15:08. Because
“[a]t new [section] 6501(e)(1)(A) Congress adopted the exact
same language the Supreme Court interpreted in Colony,”
Intermountain claims we need do nothing more than apply
Colony’s holding to this case. Appellees’ Br. 39.
Intermountain is, of course, correct that in 1954 Congress
transferred essentially all of section 275(c)’s text into section
6501(e)(1)(A), and then added two new subsections. Had the
meaning of the transferred text been well-established—either
because the text itself was unambiguous or because, although
it was ambiguous, the courts and Treasury had consistently
interpreted it—then we would agree with Intermountain that
this case is easy. We would simply assume Congress intended
the text to convey that established pre-reenactment meaning.
See Davis v. United States, 495 U.S. 472, 482 (1990) (noting
that “Congress’ reenactment of the statute . . ., using the same
language, indicates its apparent satisfaction with the
prevailing interpretation of the statute” where the prevailing
interpretation had first been offered by the Commissioner of
Internal Revenue and then been consistently “relied on” by
the courts).
 17
But we face a far different set of circumstances because
the language Congress borrowed from section 275(c) was not
only understood to be ambiguous, see, e.g., Uptegrove
Lumber, 204 F.2d at 571 (noting “real ambiguity” in section
275(c)’s text), but had been interpreted one way by the Sixth
Circuit and another by the Third. Compare Reis, 142 F.2d at
902–03, with Uptegrove Lumber, 204 F.2d at 571. Moreover,
clearly aware of that debate, Congress added subsection (i) to
section 6501(e)(1)(A) to resolve it. See supra at 8–10; see
also Colony, 357 U.S. at 32 (noting that the basis
overstatement debate had been “resolved for the future by
[section] 6501(e)(1)(A)”); Pet’r’s Reply Br. 8, Colony, Inc.,
357 U.S. 28 (1958) (No. 306), 1958 WL 91877 (explaining
that subsection (i) will “prevent future controversies as to the
applicability of the extended limitation period in ‘cost of
goods sold’ cases”); Wyatt Letter at 984–85 (expressing the
“belie[f] that sub[section] (i) . . . w[as] proposed to reflect the
rule of reason announced by cases like Uptegrove Lumber
Company v. Commissioner”). As the Seventh Circuit aptly
observed, “Congress, when revising [the provision at issue
here], was responding not to a unifying decision such as
Colony, but rather to the confusion throughout the circuits.”
Beard, 633 F.3d at 622. Under these circumstances, we
cannot simply assume that the Congress that enacted section
6501(e)(1)(A) understood the phrase “omits from gross
income” in the same way as the Congress that originally
enacted section 275(c). Cf. Jama v. Immigration & Customs
Enforcement, 543 U.S. 335, 349 (2005) (refusing to presume
that Congress had incorporated purportedly settled
interpretations of a statute when reenacting it where “[n]either
of the two requirements for congressional ratification [had
been] met . . . : Congress did not simply reenact [the statute]
without change, nor was the supposed judicial consensus so
broad and unquestioned that we must presume Congress knew
of and endorsed it”). Nor can we assume that the Supreme
 18
Court’s 1958 interpretation of that phrase’s pre-1954, pre-
reenactment meaning necessarily applies post-1954, post-
reenactment. Accordingly, before applying Colony to section
6501(e)(1)(A), we must determine whether the Supreme
Court even considered how Congress in 1954 understood the
text it borrowed from section 275(c).

Significantly, the Court concluded that the one source of
continuity between section 275(c) and section
6501(e)(1)(A)—the statutes’ essentially identical text—was
indeterminate. After all, the Court explained, “it cannot be
said that the language [of section 275(c)] is unambiguous.”
See Colony, 357 U.S. at 33 (emphasis added). As a result, the
Court ultimately relied on a different source, one not shared
by section 275(c) and section 6501(e)(1)(A)—namely, section
275(c)’s legislative history. By contrast, the Court considered
neither section 6501(e)(1)(A)’s legislative history nor the
context in which Congress passed that provision. This was no
mere oversight. Colony and the Commissioner both cited
these materials and debated whether Congress in 1954 had
endorsed Colony’s or the Commissioner’s interpretation of
the relevant text. Pet’r’s Br. 23–24, Colony, 357 U.S. 28
(1958) (No. 306), 1958 WL 91875; Resp’t’s Br. 23–24,
Colony, 357 U.S. 28 (1958) (No. 306), 1958 WL 91876;
Pet’r’s Reply Br. 6–8, Colony, Inc., 357 U.S. 28 (1958) (No.
306), 1958 WL 91877. The Court expressly declined to
resolve this debate, however, viewing it as entirely
“speculative.” Colony, 357 U.S. at 37 (“And without doing
more than noting the speculative debate between the parties as
to whether Congress [in 1954] manifested an intention to
clarify or to change the 1939 Code . . . .”).

Nor do the Court’s few references to section
6501(e)(1)(A) suggest it actually considered that provision’s
potentially distinctive meaning. Indeed, the Court first
 19
mentioned the new statute in order to explain that although
the question presented had been “resolved for the future by
[section] 6501(e)(1)(A) of the Internal Revenue Code of
1954,” it had nonetheless granted certiorari because that
question remained unresolved “for earlier taxable years” still
governed by section 275(c). Colony, 357 U.S. at 32. Rather
than signaling that it was interpreting both the pre- and post-
1954 tax code, this passage strongly suggests that the Court
was focusing on section 275(c), not section 6501(e)(1)(A).

Intermountain’s sole argument to the contrary focuses on
Colony’s only other reference to section 6501(e)(1)(A), in
which the Court “observe[d] that the conclusion we reach
[about the meaning of section 275(c)] is in harmony with the
unambiguous language of [section] 6501(e)(1)(A) of the
Internal Revenue Code of 1954.” Id. at 37. Because the Court
cited only section 6501(e)(1)(A), not that section’s new
subsections, Intermountain insists that the Court must have
been referring to section 6501(e)(1)(A)’s principal
paragraph—i.e., the one at issue in this appeal. According to
Intermountain, then, the “harmony” the Court observed was
between its holding and the meaning of the phrase “omits
from gross income” in section 6501(e)(1)(A).

The problem with Intermountain’s reading is that it
makes this passage incomprehensible. In that passage, the
Court called section 6501(e)(1)(A)’s text “unambiguous,”
even though earlier in the opinion it had characterized section
275(c)’s text as ambiguous. See Colony, 357 U.S. at 33 (“[I]t
cannot be said that the language [of section 275(c)] is
unambiguous.” (emphasis added)). Intermountain would thus
have us believe that within the span of just four pages of the
U.S. Reports, the Supreme Court illogically described
essentially identical text as both ambiguous and unambiguous.
We think a far more sensible reading is that the Court was
 20
referring only to section 6501(e)(1)(A)’s new subsection (i).
After all, subsection (i) is certainly “unambiguous” and, by
redefining gross income to mean gross receipts, subsection (i)
provides a rule “in harmony” with Colony’s holding. Colony,
357 U.S. at 37. Indeed, both Colony and the Commissioner
made exactly this point to the Court, explaining that
“[s]ubsection (i) expressly spells out the construction of
Section 275(c) contended for by” Colony. Pet’r’s Br. 24,
Colony, 357 U.S. 28 (1958) (No. 306), 1958 WL 91875; see
also Pet’r’s Reply Br. 8, Colony, Inc., 357 U.S. 28 (1958)
(No. 306), 1958 WL 91877 (explaining that subsection (i) will
“prevent future controversies as to the applicability of the
extended limitation period in ‘cost of goods sold’ cases”);
Resp’t’s Br. 23–24, Colony, 357 U.S. 28 (1958) (No. 306),
1958 WL 91876. Of course, there are differences between
Colony’s holding and subsection (i). Most important for our
purposes, subsection (i) applies only to the sale of goods or
services in the trade or business context, while nothing in
Colony suggests that the Court’s holding is so limited. But
given that Colony described itself as a taxpayer in a trade or
business with income from the sale of goods or services—i.e.,
as falling within subsection (i)’s scope had the subsection
applied pre-1954—the Court had no reason to remark on this
particular divergence. See Comm’r’s Reply Br. 6–7, UTAM,
Ltd. v. Comm’r, No. 10-1262 (D.C. Cir. Feb. 28, 2011)
(reviewing how Colony described itself in its briefs to the tax
court and the Supreme Court); see also Salman Ranch II, __
F.3d __, 2011 WL 2120044, at *6 (explaining that Colony
would have fit within the scope of subsection (i)); Beard, 633
F.3d at 620 (same).

In sum, to the extent the Court in Colony referred to
section 6501(e)(1)(A), it did so only to acknowledge that it
was interpreting section 275(c) consistently with the new
subsection (i) that Congress had added in 1954 to address the
 21
same issue prospectively in the trade or business context.
Because that observation does not directly control the
question presented here, and because it otherwise seems clear
to us that the Court in Colony dealt only with the limited task
of interpreting section 275(c) of the 1939 code for cases
arising under that code, we believe the Court left unresolved
the issue now before us—namely, how to interpret section
6501(e)(1)(A)’s “omits from gross income” language in cases
that fall beyond subsection (i)’s scope. It is to that question
that we now turn, keeping in mind that we may only reject the
Commissioner’s interpretation at Chevron step one if
Congress has unambiguously foreclosed it. Vill. of
Barrington, 636 F.3d at 659.

Focusing first on section 6501(e)(1)(A)’s relevant text—
“omits from gross income an amount properly includible
therein which is in excess of 25 percent of the amount of
gross income stated in the return”—we are, though not
technically bound by Colony, see supra 16–21, nonetheless
inclined to agree with the Supreme Court’s judgment that this
text, even read in isolation, is susceptible to both the
Commissioner’s and Intermountain’s interpretations. Colony,
357 U.S. at 33 (“[I]t cannot be said that the language [of
section 275(c)] is unambiguous”). But even if we disagreed
with the Court, once that text is read in the context of the new
subsection (i), added in 1954, we think the Commissioner’s
reading quite possibly better. Remember that subsection (i)
expressly redefines “gross income” in the trade or business
context such that overstatements of basis cannot themselves
trigger the extended statute of limitations. Because
Intermountain’s interpretation of section 6501(e)(1)(A)’s
principal paragraph would accomplish exactly the same result
but for all taxpayers, including those engaged in a trade or
business, its interpretation renders subsection (i) largely
redundant. In effect, Intermountain contends that Congress
 22
added a provision designed to exempt basis overstatements
even though it believed that the existing language already
accomplished exactly that goal. Because we generally
presume Congress does not add provisions that simply
replicate what the statute already does, see Stone v. INS, 514
U.S. 386, 397–98 (1995), we believe it at least plausible that
in 1954 Congress understood the “omits from gross income”
language to include basis overstatements and added
subsection (i) as an exception limited to the trade or business
context.

Resisting that conclusion, Intermountain points out that
“gross income” plays two different roles in section
6501(e)(1)(A), only one of which its interpretation makes
superfluous. Specifically, subsection (i)’s gross income
definition affects not only what counts as an “omission from
gross income,” but also whether a taxpayer’s total omissions
exceed 25 percent “of the amount of gross income stated in
the return,” thus triggering the extended period. 26 U.S.C. §
6501(e)(1)(A) (emphasis added). Because its interpretation of
“omits from gross income” in no way encroaches on
subsection (i)’s second role, Intermountain contends, any
redundancy between that interpretation and subsection (i)’s
first role is irrelevant.

Intermountain’s point is well taken, but it fails to account
fully for subsection (i)’s first role—the one its interpretation
admittedly makes irrelevant and that actually led Congress to
add subsection (i) in the first place. Recall that Congress
added subsection (i) amidst a debate that had divided the
courts of appeals and that specifically revolved around
whether basis overstatements constituted omissions from
gross income. See supra 7–10. Given that context, it seems
obvious that Congress intended subsection (i) to resolve that
debate in the taxpayers’ favor, though only in the trade or
 23
business context. Indeed, that is exactly how the amendment
was contemporaneously understood by the amendment’s
supporters, by the parties who argued Colony, and by the
Supreme Court itself. See supra 17 (citing Colony, 357 U.S. at
32; Pet’r’s Reply Br. 8, Colony, Inc., 357 U.S. 28 (1958) (No.
306), 1958 WL 91877; Wyatt Letter at 984–85). Thus,
although Intermountain is technically correct that its
interpretation avoids turning subsection (i) into surplusage,
we agree with the Seventh Circuit that it nonetheless
“certainly diminishe[s]” the provision’s independent
significance in a way seemingly at odds with Congress’s
original intent. Beard, 633 F.3d at 622; see also Babbitt v.
Sweet Home Chapter of Cmtys. for a Great Or., 515 U.S. 687,
701 (1995) (“When Congress acts to amend a statute, we
presume it intends its amendment to have real and substantial
effect.” (internal quotation marks omitted)).

Perhaps recognizing this problem, the Ninth Circuit
suggested that Congress enacted subsection (i) only to clarify
the statute’s previous meaning, not to change it. See
Bakersfield, 568 F.3d at 776. According to this theory,
Congress believed the phrase “omits from gross income”
already excluded basis overstatements yet passed
subsection (i) to make that understanding unmistakably clear.
But this theory is hardly robust enough to satisfy Chevron
step one’s demanding burden. Moreover, section
6501(e)(1)(A)’s House and Senate Committee reports both
directly contradict this so-called clarification theory by
characterizing subsection (i) as a “change[] from existing
law” that “redefine[s]” gross income in the trade or business
context. H.R. Rep. No. 83-1337, at 503 (1954), reprinted in
1954 U.S.C.C.A.N. at 4562; S. Rep. No. 83-1622, at 558
(1954), reprinted in 1954 U.S.C.C.A.N. at 5233. We are thus
unpersuaded that Congress intended subsection (i) as a mere
clarification.
 24
Finally, Intermountain argues that even if the “omits from
gross income” language had an ambiguous meaning when
passed in 1954, Congress has since ratified the application of
Colony’s interpretation to sections 6501(e)(1)(A) and
6229(c)(2). In support, it points out that Congress reenacted
section 6501(e)(1)(A) many times and that it enacted section
6229(c)(2)—all after the Court in Colony definitively
interpreted section 275(c)’s corresponding language. This
theory, however, collides with our understanding of Colony as
interpreting only section 275(c). See supra 16–21. Given that
the Supreme Court limited itself to interpreting section
6501(e)(1)(A)’s predecessor, we have no reason to presume
from Congress’s silence that it treated that opinion as having
authoritatively interpreted section 6501(e)(1)(A) itself. Nor do
we see any clear reason to treat section 6229(c)(2) differently,
especially since it seems likely that when first enacting that
section, Congress intended it to have the same meaning as
still-operative section 6501(e)(1)(A) rather than that of long-
since defunct section 275(c).

In a post-argument letter filed pursuant to Federal Rule of
Appellate Procedure 28(j), Intermountain offers a variation on
this reenactment theory based on “the Commissioner’s prior
position [i.e., before the Son of BOSS controversy] on the
import and effect of the Supreme Court’s decision in Colony.”
Appellees’ 28(j) Letter 1, Apr. 11, 2011. Intermountain’s
unsolicited attempt to introduce a new legal theory based on
long-available sources neither included in its brief nor even
raised at oral argument comes far too late to warrant our
attention. See United States ex rel. Miller v. Bill Harbert Int’l
Const., Inc., 608 F.3d 871, 878 n.1 (D.C. Cir. 2010) (treating
as forfeited arguments raised for the first time in a post-oral
argument 28(j) letter unless based on new authority).
 25
In sum, because the Court in Colony never purported to
interpret section 6501(e)(1)(A); because section
6501(e)(1)(A)’s “omits from gross income” text is at least
ambiguous, if not best read to include overstatements of basis;
and because neither the section’s structure nor its legislative
history nor the context in which it was passed nor its
reenactment history removes this ambiguity, we conclude
that, outside the trade or business context, nothing in section
6501(e)(1)(A) unambiguously forecloses the Commissioner
from interpreting “omissions from gross income” as including
basis overstatements. We reach the same conclusion with
respect to section 6229(c)(2) in light of Intermountain’s
failure to timely raise any argument that the two provisions
should be interpreted differently outside the trade or business
context. See supra 12–13.

IV.
Given this conclusion, we would ordinarily next analyze
the Commissioner’s interpretation of sections 6501(e)(1)(A)
and 6229(c)(2) under Chevron step two. But Intermountain
insists that the Commissioner’s interpretation is entitled to no
Chevron deference at all. Specifically, it argues that the
regulations were promulgated in a manner that lacked “ ‘the
fairness and deliberation that should underlie a
pronouncement’ meriting Chevron deference” given that the
“Commissioner[] reactive[ly] issu[ed] . . . the [regulations]
immediately following the rejection of his identical litigating
position by two Courts of Appeals and the Tax Court.”
Appellees’ Br. 37 (quoting United States v. Mead Corp., 533
U.S. 218, 230 (2001)). Embracing this argument, amicus
Bausch & Lomb quotes the Second Circuit’s decision in
Chock Full O’ Nuts Corp. v. United States: “[T]he
Commissioner may not take advantage of his power to
promulgate retroactive regulations during the course of
litigation for the purpose of providing himself with a defense
 26
based on the presumption of validity accorded to such
regulations.” 453 F.2d 300, 303 (2d Cir. 1971).

Notwithstanding the rhetorical force of this argument, we
agree with the Commissioner that it runs afoul of binding
Supreme Court precedent that has, for all practical purposes,
superseded Chock Full O’ Nuts. As a general matter, the
Supreme Court has made crystal clear that it is utterly
“irrelevant” to the question of whether Chevron deference is
due “[t]hat it was litigation which disclosed the need for the
regulation.” Smiley v. Citibank (South Dakota), N.A., 517 U.S.
735, 741 (1996). Indeed, just this Term, while granting
Chevron deference to another Treasury regulation interpreting
the tax code, the Supreme Court explained that “we have
found it immaterial to our analysis that a regulation was
prompted by litigation.” Mayo Found., 131 S. Ct. at 712
(internal quotation marks omitted). Nor, the Court has held,
does it matter that the agency promulgating the regulation is a
party in the very case that prompted the regulation and that
the agency, having lost in the lower courts, now seeks to rely
on the regulation to reverse its loss on appeal. Confronting
exactly that scenario in United States v. Morton, the Court
reasoned that even “assuming the promulgation of [the
regulation] was a response to this suit, that demonstrates only
that the suit brought to light an additional administrative
problem of the type that Congress thought should be
addressed by regulation.” 467 U.S. 822, 835 n.21 (1984).
Indeed, according to the Commissioner, that is exactly the
case here where “[f]or almost 50 years, no problems regarding
Colony’s application of [section] 6501(e)(1)(A) outside the
trade-or-business context occurred until 2007, when the Tax
Court . . . and the Court of Federal Claims . . . applied Colony
to block application of the six-year assessment period to
understated capital gain resulting from basis overstatements.”
Appellant’s Br. 48 (referring to Bakersfield, 128 T.C. 207 and
 27
Grapevine Imports, 77 Fed. Cl. 505 (2007), rev’d, 636 F.3d
1368). Thus bound by exactly on-point Supreme Court
precedent, we reject Intermountain’s argument.

The partnership in the companion case, UTAM, offers
another argument for denying Chevron deference to the
Commissioner—namely, that “[i]nterpreting a statute of
limitations [like the ones here] is outside Treasury’s
expertise.” Appellee UTAM’s Br. 34, UTAM, Ltd., No. 10-
1262 (D.C. Cir. Feb. 7, 2011). UTAM finds some support for
this argument in a Third Circuit decision ruling Chevron
inapplicable to INS’s interpretation of a statute of limitations
because “a statute of limitations is a general legal concept
with which the judiciary can deal at least as competently as
can an executive agency.” Bamidele v. INS, 99 F.3d 557, 562
(3d Cir. 1996). Expressly rejecting that analysis, the Fourth
Circuit recognized that statutes of limitations may be
embedded within complex and deeply interconnected
regulatory systems, thus requiring “precisely the sort of
agency expertise to which Chevron requires the courts to
defer.” See Asika v. Ashcroft, 362 F.3d 264, 271 n.8 (4th Cir.
2004). Although this circuit has yet to decide whether or
under what circumstances to give Chevron deference to
agency interpretations of statutes of limitations, we find the
Fourth Circuit’s reasoning more persuasive than the Third’s,
at least in the context of this case. Cf. Kennecott Utah Copper
Corp. v. Dep’t of Interior, 88 F.3d 1191, 1210 (D.C. Cir.
1996) (assuming without deciding that Chevron deference
was owed an Interior regulation interpreting a statute of
limitations); Nat’l Grain & Feed Ass’n v. OSHA, 845 F.2d
345, 346 (D.C. Cir. 1988) (per curiam) (suggesting that
Chevron deference would be owed to an OSHA regulation
interpreting a statute of limitations were OSHA to later issue
one). The interpretive question here is exactly like the one
described by the Fourth Circuit, involving, as it does, the
 28
Commissioner’s complex administrative system for assessing
tax deficiencies and his expert interpretation of technical
statutory language (“omits from gross income”).

Arriving at last at Chevron step two, our task is easy.
Intermountain’s only argument that the Commissioner’s
interpretation is unreasonable is that it conflicts with Colony.
But having held that Colony applies neither to section
6501(e)(1)(A) nor to section 6229(c)(2), see supra 16–21, we
see nothing unreasonable in the Commissioner’s decision to
diverge from Colony’s holding.

V.
Finally, Intermountain and UTAM advance several
arguments for why the regulations neither apply to
Intermountain (or UTAM) nor were validly promulgated. We
consider each in turn.

Reiterating an argument on which the Tax Court relied,
Intermountain first contends that the Commissioner’s
regulations are inapplicable to this case under their own
“effective/applicability date” provisions. Those provisions
state:

Effective/applicability date. . . . [T]his section
applies to taxable years with respect to which
the period for assessing tax was open on or
after September 24, 2009.

26 C.F.R. §§ 301.6501(e)-1(e)(1); 301.6229(c)(2)-1(b)
(2011); see also 26 C.F.R. §§ 301.6501(e)-1T(b) (2009);
301.6229(c)(2)-1T(b) (The temporary regulations in effect
when the Tax Court ruled included a slightly different version
of this provision which, with the changes italicized, stated:
“The rules of this section apply to taxable years with respect
 29
to which the applicable period for assessing tax did not expire
before September 24, 2009.”). In the preamble to the final
regulations, the Commissioner interpreted the phrase “the
period for assessing tax” to include “all assessment periods
Congress has provided, including the six-year period,”
Appellant’s Reply Br. 28, meaning “the final regulations
apply to taxable years with respect to which the six-year
period for assessing tax under section 6229(c)(2) or
6501(e)(1) was open on or after September 24, 2009,” T.D.
9511, 75 Fed. Reg. at 78,898. The preamble, in turn, explains
that a taxable year is “open” if, among other things, it is the
“subject of any case pending before any court of competent
jurisdiction . . . in which a decision had not become final
(within the meaning of section 7481).” Id. Finally, section
7481 provides, in effect, that a decision is not final “until the
last bell has rung in the last court.” Appellant’s Reply Br. 29.
In other words, according to the Commissioner, the
regulations apply at least to any taxpayer or partnership
whose case was pending in any court at any level on or after
September 24, 2009, which all agree includes Intermountain.
See also IRS Chief Counsel Notice CC-2010-001 (Nov. 23,
2009) (interpreting “the temporary regulations [to] apply to
any docketed Tax Court case in which the period of
limitations under sections 6229(c)(2) and 6501(e)(1)(A), as
interpreted in the temporary regulations, did not expire with
respect to the tax years at issue, before September 24, 2009,
and in which no final decision has been entered.”).

Intermountain argues that the Commissioner’s
interpretation essentially requires us to apply the regulations
before determining whether they are even applicable—an
approach the Tax Court characterized as “irreparably marred
by circular, result-driven logic.” Intermountain II, 134 T.C. at
219. Instead, Intermountain argues, we must first apply the
applicability provision based not on the new law set out in the
 30
regulations’ other provisions, but rather on the law as it
existed before the regulations were issued. Because
Intermountain believes that Colony represents the pre-
regulation state of the law, and because under Colony only the
three year statute of limitations would have applied,
Intermountain insists that the only relevant “period for
assessing tax” expired, and so closed, before September 24,
2009. According to Intermountain, then, the regulations do
not even reach this case.

We grant the highest level of deference to an agency’s
interpretation of its own regulations, deferring unless the
interpretation is “plainly erroneous or inconsistent with the
regulation.” Auer v. Robbins, 519 U.S. 452, 461 (1997)
(internal quotation marks omitted). Although Intermountain’s
critique has some force, we think it ultimately insufficient to
overcome this extraordinarily deferential standard of review.
To begin with, Intermountain’s argument depends in
significant part on the notion, rejected above, that before the
regulations issued, Colony applied to sections 6501(e)(1)(A)
and 6229(c)(2). But because the pre-regulation state of the
law was neither settled nor clear, the Commissioner could
reasonably read each of the regulations’ provisions, including
the applicability provision, in light of the others. Moreover,
we have no doubt that the Commissioner intended from the
moment these regulations issued to apply them to cases
pending as of September 24, 2009, leaving us confident that
this interpretation is no “post-hoc rationalization[].” Bowen v.
Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988) (internal
quotation marks omitted). After all, the regulations were
prompted by, among other things, this and other similar
pending cases; the interpretation was first articulated in a
Chief Counsel’s Notice shortly after publication of the
temporary regulations and while the final regulations’
comment period remained open; and the Commissioner
 31
announced his definitive interpretation in the preamble to the
final regulations. In sum, although the Commissioner created
a needlessly complex problem for himself by drafting a fairly
cryptic applicability provision, his interpretative solution is
neither plainly erroneous nor inconsistent with the regulation.
The regulations thus apply to this case.

Intermountain next contends that applying the regulations
under the circumstances of this case would make them
impermissibly retroactive. This is so, Intermountain says,
because the regulations change settled law—namely,
Colony’s interpretation of sections 6501(e)(1)(A) and
6229(c)(2)—thus disrupting the expectations of taxpayers or
partnerships who filed returns for tax years prior to the
regulations’ effective date. We disagree. Because Colony
never applied to section 6501(e)(1)(A) or section 6229(c)(2),
see supra 16–21, there was no settled law for the regulations
to change. Given our treatment of Colony, the most
Intermountain might have argued is that the regulations raise
a different sort of retroactivity issue, i.e., that they bring
clarity to an area of the law that had been ambiguous during
the tax year at issue in this case. But because neither
Intermountain nor UTAM makes this particular argument, we
decline to consider it. United States v. Reeves, 586 F.3d 20, 26
(D.C. Cir. 2009) (declining to address an argument not argued
on appeal).

Focusing next on the regulatory process, UTAM and
amicus Bausch & Lomb urge us not to apply the final
regulations because, they say, the Commissioner failed to
keep an “open mind” during the notice-and-comment period.
Ordinarily, we evaluate an agency’s so-called open
mindedness only when it issues final regulations without the
requisite comment period and then tries to cure that
Administrative Procedure Act violation by holding a post-
 32
promulgation comment period. See, e.g., Advocates for
Highway & Auto Safety v. Fed. Highway Admin., 28 F.3d
1288, 1291–93 (D.C. Cir. 1994). Here, the Commissioner
simultaneously issued immediately effective temporary
regulations and a notice of proposed rulemaking for identical
final regulations and then held a 90-day comment period
before finalizing the regulations. According to UTAM and
Bausch & Lomb, that procedure, although typical of the
Commissioner’s practice, violates the Administrative
Procedure Act, thus requiring an open-mindedness inquiry.

Even assuming the applicability of this framework,
however, we believe the final regulations were validly
promulgated. UTAM and Bausch & Lomb criticize the
Commissioner for the preamble’s “silen[ce] regarding the
numerous arguments” advanced in voluminous related
litigation, Amicus’s Br. 14–15, and for “ma[king] only
immaterial changes” in response to those comments, Appellee
UTAM’s Br. 55. But an open-mindedness review focuses not
on whether the Commissioner responded to litigants, but
rather on whether he has “afforded the comments [received
during the comment period] particularly searching
consideration.” Advocates for Highway & Auto Safety, 28
F.3d at 1292 (emphasis added) (internal quotation marks
omitted). Moreover, “[w]hile changes and revision are
indicative of an open mind, an agency’s failure to make any
does not mean its mind is closed.” Id. Here, the
Commissioner received only one comment, which
characterized the proposed regulations as having “retroactive
effect ‘in that taxable years which had closed are now
reopened.’ ” T.D. 9511, 75 Fed. Reg. at 78,898 (quoting
comment received). Responding to this comment in the
preamble to the final regulations, the Commissioner
“disagreed with the characterization of the regulations as
retroactive” and noted that “[t]he final regulations have been
 33
clarified to emphasize that they only apply to open tax years,
and do not reopen closed tax years.” Id. This last response
appears to mean that although the regulations apply to
pending cases such as this one, they have no applicability to
cases such as Bakersfield Energy Partners, 568 F.3d 767, in
which the Commissioner lost and declined to appeal. The
Commissioner also responded to the commenter’s reliance on
the 1996 amendments to section 7805(b), which prohibit the
Commissioner from making certain regulations retroactive.
Specifically, the Commissioner explained that those
amendments have no applicability to the statutory provisions
interpreted by the regulations and, in any event, that “these
regulations are not retroactive.” T.D. 9511, 75 Fed. Reg. at
78,898. Given the Commissioner’s “searching consideration”
of the comment, we have no doubt that he kept the requisite
open mind. Advocates for Highway & Auto Safety, 28 F.3d at
1292 (internal quotation marks omitted).

VI.
In sum, the Commissioner’s regulations were validly
promulgated, apply to this case, qualify for Chevron
deference, and pass muster under the traditional Chevron two-
step framework. Because the Tax Court concluded otherwise
and failed to apply the Commissioner’s interpretation of
sections 6501(e)(1)(A) and 6229(c)(2), we reverse that court’s
grant of summary judgment. In addition, we remand for the
Tax Court to consider Intermountain’s alternative argument,
made in the tax court but unaddressed there, that
Intermountain avoided triggering the extended statute of
limitations by “adequately disclos[ing] to the IRS the basis
amount it applied in connection with the transaction at issue.”
Appellees’ Br. 57 (emphasis added) (relying on section
6501(e)(1)(A)(ii)).

So ordered.