*6 P is a foreign corporation whose only substantial asset is
unimproved land in the United States. On its 1994, 1995, and
1996 Federal income tax returns, P recognized rent and option
income and claimed deductions for taxes and licenses, the result
of which was a reported loss for each year. P filed each return
after its due date, but before any contact from R. R determined
that
expenses because it filed its returns untimely. In Anglo-Am.
Revenue Act of 1932, ch. 209, 47 Stat. 230, an almost verbatim
predecessor to
filing requirement and rejected R's contrary interpretation.
Subsequently, the Court of Appeals for the Fourth Circuit
construed like predecessor text similarly, also in rejection of
R's contrary interpretation. *7 See
1248 (1940);
B.T.A. 910 (1940). R continues to adhere to his rejected
interpretation and now attempts to support that interpretation
by citing Treasury regulations issued in 1990. Those regulations
interpret
corporation generally is entitled to deduct its expenses only if
it files a timely return.
Held: A timely filing requirement is not found in a plain
reading of
the regulations is invalid in that it is unreasonable under a
plain reading of
the considerations set forth in
*97 LARO, Judge: Petitioner petitioned the Court to redetermine respondent's determination of deficiencies in its Federal income taxes for its taxable years ended May 31, 1994, 1995, and 1996 (1994, 1995, and 1996 taxable years, respectively; collectively, subject years), and additions thereto under
Addition to tax
Taxable Year Deficiency
1994 $ 7,200 $ 1,800.00
1995 5,850 1,462.50
1996 1,800 450.00
*9 We decide whether petitioner may deduct the ordinary and necessary expenses it incurred during the subject years. The expenses relate to income treated as effectively connected to the conduct of a trade or business in the United States (effectively connected income), and petitioner claimed the expenses on its Federal income tax returns, which it filed before any contact from respondent. Respondent determined in the notice of deficiency that
In
In 1990, the Secretary issued
*12 Petitioner argues that
We agree with petitioner that
FINDINGS OF FACT
Many facts were stipulated and are found accordingly. We incorporate herein by this reference the stipulated facts and the exhibits submitted therewith.
*100 I. Background
Petitioner is a Barbados corporation whose mailing address was in Bridgetown, Barbados, when its petition was filed with the Court. It is an accrual method taxpayer that for Federal income tax purposes files a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation (Form 1120-F), on the basis of a fiscal year ending on May 31. Its sole activity during the subject years was owning 160 acres of unimproved real estate (U.S. real estate) in San Diego County, California, and receiving option and rental income from the U.S. real estate. Petitioner has never engaged*14 in a trade or business in the United States, and it does not have a separate business activity in Barbados.
II. Petitioner's Formation and Issuance of Additional SharesRaimundo Arnaiz-Rosas (Rosas) is a citizen and resident of Mexico. He acquired the U.S. real estate on December 30, 1986. In June 1991, he formed petitioner as his wholly owned corporation. He transferred the U.S. real estate to petitioner on November 21, 1991.
Aurora Elsa Arnaiz (Arnaiz) is the sister of Rosas. She is a citizen and resident of Mexico. On June 1, 1992, petitioner issued additional shares of its stock to Arnaiz. Afterwards, Arnaiz owned 52 percent of petitioner's stock, and Rosas owned the remaining 48 percent.
III. Petitioner's Initial Tax ReturnOn September 14, 1992, petitioner filed a Form 1120-F with respondent's service center in Philadelphia, Pennsylvania (Philadelphia Service Center), for its short taxable year from June 27, 1991, through May 31, 1992 (1992 taxable year). The return (petitioner's initial return) was petitioner's first Federal income tax return. That return was prepared by Francisco A. F. Cervantes (Cervantes), petitioner's tax adviser and certified public accountant in California. *15 As to petitioner's 1992 taxable year, petitioner's initial return reported that petitioner had no income or expense, that it had not engaged in a trade or business in the United States, and that it had no effectively connected income. Petitioner's initial return also reported that petitioner's business activity was real estate and that its product or service was investment. *101 Petitioner's initial return also reported that petitioner was incorporated in Barbados and that petitioner was subject to income tax under the laws of Barbados.
IV. U.S. Real EstateThe U.S. real estate has been vacant land throughout the subject years. During the subject years, an apparently unrelated entity leased from petitioner approximately 10 acres of the U.S. real estate for use as a skydiving landing zone. Pursuant to the lease agreements, the lessee was responsible for maintenance costs, utilities, license fees, personal property taxes, and other costs associated with its use of the leased property. Between March 16, 1993, and April 1, 1996, another apparently unrelated entity held an option to purchase a portion of the U.S. real estate.
During the respective subject years, petitioner realized rental*16 income of $ 12,000, $ 18,000, and $ 12,000 as to the lease and $ 36,000, $ 21,000, and zero dollars as to the option. During the same respective years, petitioner incurred expenses totaling $ 77,059, $ 62,418, and $ 40,041 for real property taxes payable to the County of San Diego, franchise taxes payable to the State of California, and other fees.
V. Petitioner's Tax Returns Other Than the Initial ReturnOn July 23, 1999, petitioner filed with the Philadelphia Service Center a Form 1120-F for its taxable year ended May 31, 1993 (1993 taxable year). Also on that date, petitioner voluntarily (before any contact from respondent) filed with the Philadelphia Service Center a Form 1120-F for each of the subject years (collectively, subject returns). Cervantes first advised petitioner in 1999 that it had to file the four returns, and Cervantes prepared those returns shortly after giving this advice. 6 Petitioner had no communications with Cervantes as of the time of this advice going back to the earlier time at which petitioner's initial return was filed. When the four returns were filed, respondent had no knowledge that the returns were overdue.
*17 The four returns filed in 1999 each listed petitioner's U.S. employer identification number and reported that petitioner *102 was incorporated in Barbados, that petitioner was subject to income tax under the laws of Barbados, and that petitioner was not liable for a United States branch profits tax. Each return also reported that petitioner's business activity was real estate and that its product or service was investment. Each return also reported that petitioner had not engaged in a trade or business in the United States, but that petitioner had realized a taxable loss effectively connected with the conduct of a trade or business in the United States. None of the returns included a statement under
On its Form 1120-F for its 1993 taxable year, petitioner recognized option income of $ 16,290 and deducted an expense for taxes of $ *18 52,081, resulting in a reported taxable loss of $ 35,791. On the respective subject returns, petitioner recognized rental income of $ 12,000, $ 18,000, and $ 12,000 and option income of $ 36,000, $ 21,000, and zero dollars. Petitioner also on the respective subject returns deducted expenses for taxes and licenses in the total amounts of $ 77,059, $ 62,418, and $ 40,041, resulting in reported losses (without consideration of any net operating loss (NOL) carryforward) of $ 29,059, $ 23,418, and $ 28,041. Petitioner reported on its Form 1120-F for its 1994 taxable year that it had available as an NOL carryover its prior year's loss of $ 35,791. Petitioner reported on its Form 1120-F for its 1995 taxable year that it had available as an NOL carryover its prior years' losses totaling $ 64,850 ($ 29,059 + $ 35,791). Petitioner reported on its Form 1120-F for its 1996 taxable year that it had available as an NOL carryover its prior years' losses totaling $ 88,268 ($ 23,418 + $ 29,059 + $ 35,791).
VI. Respondent's DeterminationOn January 31, 2002, respondent issued the notice of deficiency to petitioner for the subject years. 7 Respondent determined *103 the deficiencies shown therein by *19 disallowing all of the deductions claimed on the subject returns and applying the corporate income tax rates of
OPINION
I. Burden of ProofThe Commissioner's determinations in a notice of deficiency are generally presumed correct, and taxpayers generally bear the burden of proving those determinations wrong. See
The parties disagree on the
We agree with petitioner. To best understand our decision, we first discuss the relevant provisions and developments in the law which preceded the issuance of the disputed regulations. We then address our interpretation of the relevant text and the standard by which we judge the disputed regulations to be invalid.
III. Relevant Filing RequirementsEvery corporation subject to Federal income tax must file a Federal income tax return with respect to that tax. See
Petitioner did not conduct a trade or business in the United States at any time from its inception through the close of the last subject year. Thus, but for an election under
*23 *105 IV. Place for Filing Returns
(2) CORPORATIONS. -- Returns of corporations shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corporation, or, if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Maryland.
Thus, before the enactment of the 1954 Code, a foreign corporation such as petitioner was required to file its Federal income tax returns at Baltimore, Maryland.
Since the enactment of the 1954 Code, a corporation generally must file its Federal income tax returns with the District Director for the internal revenue district in which*24 is located the corporation's principal place of business, principal office, or agency. See
As relevant here,
The instructions for the subject returns state that taxpayers must file their Forms 1120-F "with the Internal Revenue Service Center, Philadelphia, PA 19255". In accordance with these instructions, petitioner filed the subject returns with the Philadelphia Service Center. 9
*26 V.
A foreign corporation engaged in a trade or business within the United States is taxable under
A foreign corporation that realizes U.S. source income that is not effectively connected income may elect to treat the U.S. source income as effectively connected income if the U.S.*107 source income is derived from real*27 property located in the United States. See
For purposes of
foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the manner prescribed in subtitle F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. * * *
B. History of Relevant Provisions1. Predecessors to
We trace
SEC. 233. ALLOWANCE OF DEDUCTIONS AND CREDITS.
A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this title only by filing or causing to be filed with the collector a true and accurate return of its total income received from all sources in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.
Congress enacted
In the 1954 Code, Congress recodified
(c) Allowance of Deductions and Credits. --
(1) Deductions allowed only if return filed. -- A foreign
corporation shall receive*30 the benefit of the deductions allowed
to it in this subtitle only by filing or causing to be filed
with the Secretary or his delegate a true and accurate return of
its total income received from all sources in the United States,
in the manner prescribed in subtitle F, including therein all
the information which the Secretary or his delegate may deem
necessary for the calculation of such deductions.
The House committee report underlying the 1954 Code stated as to this action: "
*109 Deductions and credits allowed only if return filed.
Paragraph (2) of
rule contained in
foreign corporation is to receive the benefit of the allowable
deductions only by filing a true and accurate return of its
total income (including income subject to tax under section
make clear that the return must also include the income derived
from sources without the United States which is effectively
connected with the conduct of a trade or business within the
United States. This rule has also been extended to apply to
credits against tax, such as the foreign tax credit, other than
the credit provided by
or the credit provided*32 by
gasoline and lubricating oil. As so amended,
section 3(d) of the bill. [H. Rept. 1450, 89th Cong. 2d Sess. 90
(1966).]
As to the addition of
As a general rule, the bill provides that income of a
nonresident alien or foreign corporation will be subject to the
flat 30-percent (or lower treaty) rate if it is not effectively
connected with the conduct of a trade or business within the
United States. The regular individual or corporate rates apply
to income which is effectively connected to the conduct of a
U.S. trade or business. However, the foreigner may elect to
treat real property income as if it were income effectively
connected with a U.S. business. This is to permit the deductions
attributable to this real property income to be deducted from
it. * * * [S. Rept. 1707, 89th Cong., 2d Sess. 19 (1966),
Cf. id. at 26,
Taxing income on real property at a flat 30-percent rate without
the allowance of allocable deductions -- which in the case of
this type of income may be relatively large -- may result in
quite heavy tax burdens on this type of income. Your committee
agrees with the House that the law in this area should be
clarified and doubts whether the disallowance of deductions in
such cases is appropriate. Moreover, the disallowance of
deductions in such cases would tend to discourage foreign
investment in U.S. realty.
2. Section 217 of the Revenue Act
a. Overview
Ten years before the Revenue Act of 1928, 45 Stat. 791, Congress enacted in
NONRESIDENT ALIENS -- ALLOWANCE OF DEDUCTIONS*34 AND CREDITS.
Sec. 217. That a nonresident alien individual shall receive the
benefit of the deductions and credits allowed in this title only
by filing or causing to be filed with the collector a true and
accurate return of his total income received from all sources
corporate or otherwise in the United States, in the manner
prescribed by this title, including therein all the information
which the Commissioner may deem necessary for the calculation of
such deductions and credits: * * *
From the outset, the Secretary interpreted
Art. 311. Allowance of deductions and credits to nonresident
alien individual. -- Unless a nonresident alien individual shall
render a return of income as required in article 404 [i.e., "a
full and accurate return on form 1040 (revised) or form 1040 A
(revised) of his income received from sources within the United
States, regardless of amount"], the tax shall be collected on
the basis of his gross income (not his net income) from sources
within the United States. Where a nonresident alien has various
sources of *111 income within*36 the United States, so that from any one
source or from all sources combined the amount of income shall
call for the assessment of a surtax, and a return of income
shall not be filed by him or on his behalf, the Commissioner
will cause a return of income to be made and include therein the
income of such nonresident alien from all sources concerning
which he has information, and he will assess the tax and collect
it from one or more of the sources of income within the United
States of such nonresident alien, without allowance for
deductions or credits. * * *
b. Relationship to Former
The Court of Appeals for the Fourth Circuit has observed that Article 311 of Regulations 45 contains the Secretary's longstanding construction of
3.
SEC. 235. RETURNS.
In the case of a foreign corporation not having any office or
place of business in the United States the return, in lieu of
the time prescribed in section 53(a)(1), shall be made on or
before the fifteenth day of the sixth month following the close
of the fiscal year, or, if the return is made on the basis of
the calendar year then on or before the fifteenth day of June.
If any foreign corporation has no office or place of business in
the United States but has an agent in the United States, the
return shall be made by the agent.
*112 VI. Relevant Caselaw
A. Overview
*38 This Court has observed that
In the seminal case of
*113 Section
The Board, in a reviewed opinion with no recorded dissent, disagreed with the Commissioner's interpretation of the relevant text and held that the taxpayer was entitled to its deductions even though*41 its returns had been filed untimely. See
*114 They seem to have a more or less common pattern. Thus
aliens,
of the United States who are in receipt of income from sources
within possessions of the United States, and
manner of filing returns for a foreign corporation.
while
separate sections deal with "manner" and "time", we think it
highly improbable that Congress ever intended to include the
element of time in the section dealing primarily with the manner
of filing. * * * [
In Mills, Spence & Co. v. Commissioner, a Memorandum Opinion of the Board of Tax Appeals dated Oct. 5, 1938, the Board followed its decision in
That the petitioner received the gross incomes, incurred the
expenses, and sustained the net losses as set out in the
tabulation is not in dispute. The contention of respondent is
that such expenses are not deductible, for the sole reason that
the petitioner, being a foreign*44 corporation, is prohibited from
receiving the benefit of such deductions by the provisions of
section
of its returns for the periods involved was timely filed. The
gist of his contention is that the words in those sections "in
the manner prescribed in this title" embrace timely filing of
returns within their meaning and that, consequently, deductions
are allowable to a foreign corporation only when its returns are
filed within the time specified in section
Acts of 1928 and
petitioner should *115 have filed its returns for the periods
involved on or before June 15 of each of the years 1931, 1932,
1933, and 1934, but did not file any returns until February 21,
1936, when it filed returns for all the periods. The respondent
argues that as a consequence of such untimely filing of the
returns the petitioner is not entitled to the deductions of the
expenses involved and that the tax should be computed upon its
gross income.
We do not agree*45 with respondent's contention. It is unnecessary
to assign any reason for such conclusion other than to say that
our decision on this point is clearly controlled by the holding
of the Board in Anglo-American Direct Tea Trading Co.,
Ltd., promulgated October 4, 1938, 36 B.T.A. No. 94.
Accordingly we hold that petitioner is entitled to the deduction
of the expenses as set out in the above tabulation and that
respondent erred in computing petitioner's taxes on the basis of
its gross income. [Mills, Spence & Co. v. Commissioner,
supra; fn. ref. omitted.]
D. Am. Inv. and Gen. Trust Co.
In Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum Opinion of the Board of Tax Appeals dated April 13, 1939, the Board again applied its holding in
this is*46 not a "no return" case. It is obvious, however, that the
petitioner was delinquent in filing its returns. The returns
were due not later than June 15, 1930 and June 15, 1931, whereas
they were not filed until after June 12, 1934. The Commissioner
argues that this foreign corporation can not receive the benefit
of the deductions and credits allowed under Title I of the
Revenue Act of 1928 because the filing of the delinquent returns
was not the filing of returns "in the manner prescribed" in
Title I. This same argument has been considered and rejected by
the Board in the case of Anglo-American Direct Tea Trading
of that case. [Am. Inv. and Gen. Trust Co., Ltd. v.
Commissioner, supra.]
E. Taylor Sec., Inc.Next, the Board decided
The Board held that the taxpayer was not entitled to its claimed deductions because it had not filed a return as required by the statute. In rejecting any argument that the taxpayer's returns were "returns" for this purpose, the Board distinguished
*48 Here the question is whether the petitioner, by filing returns
after the respondent made his determination of deficiencies
under the circumstances presented, relieved itself of the
adverse condition in which it was situated by reason of section
have been entitled by the timely filing of returns. In our
opinion it may not.
* * * we are unable to conclude that in enacting section
supra, it was the intention of Congress that delinquent
returns filed by a foreign corporation after the respondent's
determination should constitute the returns required as a
prerequisite to the allowance of the credits and deductions
ordinarily allowable to the corporations. * * * By section
deductions ordinarily allowable is specifically predicated upon
such corporations filing returns. In view of such a specific
prerequisite it is inconceivable that Congress contemplated by
that section that taxpayers could wait indefinitely to file
*49 returns and eventually when the respondent determined
deficiencies against them they could then by filing returns
obtain all the benefits to which they would have been entitled
if their returns had been timely filed. Such a construction
would put a premium on evasion, since a taxpayer would have
nothing to lose by not filing a return as required by statute.
[
*117 F. Ardbern/Blenheim
One year later, the Board decided
The Board applied
Petitioner did not, by the lodgment of returns with * * * [the
revenue agent], discharge the duty which the statute laid upon
it. Also, the action of petitioner in filing returns with the
collector at Baltimore on October 28, 1938, was ineffective to
bring it within the limitations of the statute so as to entitle
it to the benefit of deductions. These returns were filed (a)
after respondent had determined the deficiencies and prepared
returns for petitioner under
Statutes, as amended, and (b) after the petition and answer had
been filed and the case was*51 at issue before the Board, and only
approximately two and one-half months prior to the hearing.
Returns filed under such circumstances do not meet the
requirements of
instant proceeding are not distinguishable in any material
respect from those of the Taylor case. On authority of that
decision and for the reasons therein stated, which need not be
repeated here, respondent's action in computing the present
deficiencies without the allowance of deductions is approved.
[
Upon appeal, the Court of Appeals for the Fourth Circuit modified and remanded the Board's decision on the authority *118 of
fair dealing between the Government and a taxpayer would require
the agent to whom the returns were improperly tendered for
filing to advise the taxpayer as to the official and place where
the returns should be filed. Here*52 the agent Muller rejected the
returns on the sole ground that they were improperly executed
and did not notify the taxpayer that the returns could in no
event be filed with him. Soon after the refusal to accept the
returns the deficiency was determined against the taxpayer.
It is conceded that, if the return which taxpayer attempted to
file before Muller in June 1937 had been properly filed before
the Collector at Baltimore, taxpayer would have been entitled to
the deductions claimed, which represented expense incurred in
connection with the earning of the income taxed. The deductions
are denied merely because they were not claimed in a return
properly filed until after the deficiency assessment had been
made against taxpayer upon a return filed for him by the
Commissioner in which no deductions were allowed. We think,
however, that when return was filed by the Commissioner for the
taxpayer, he should have given him the benefit of proper
deductions for expense of doing business, of which he had been
notified by the return which taxpayer had attempted*53 to file with
his agent, or, at least, that taxpayer should be allowed such
deductions when, upon the assessment of a deficiency against
him, he shows that prior to its assessment he attempted in good
faith to file a return in which such deductions were claimed.
This is nothing but elementary justice, and we find nothing in
the statute which forbids it. The return made by the
Commissioner was clearly not based upon the best available
information.
While there is a specific penalty of 25 per centum fixed for
failure to file tax returns,
* * there is no provision that there shall be an added penalty
in the form of not allowing the delinquent taxpayer deductions
to which it otherwise would be entitled. The Board held in
and "time," we think it highly improbable that Congress ever
intended to include the element of time in the section dealing
primarily with the manner of filing. We hold, therefore, *54 that
the mere fact the return was not filed within the time
prescribed by
presented, preclude the allowance of deductions claimed."
[
The Board also followed
The Board held that the filing of Form 1120H did not satisfy the requirements of
Undoubtedly a taxpayer may litigate a determination of
respondent on the basis of a return made by * * * [the
Commissioner]. But, a "return" filed by a taxpayer after such a
return has been prepared and filed for him by respondent, under
the circumstances existing here, is a nullity and does not
comply with
advantage from an alleged return submitted by the taxpayer not
only after respondent's filing of its return * * * but also
after the issuance of a notice of deficiency.
On appeal, the Court of Appeals for the Fourth Circuit affirmed. The court first quoted
The difficulty here encountered by the Commissioner in
attempting to ascertain the petitioner's correct income tax is a
striking example of the many administrative problems inherent in
the application of the federal income tax to foreign
corporations. This has prompted Congress to impose special
conditions on such corporations. Indeed, unless a foreign
corporation is induced voluntarily to advise the Commissioner of
all of its income attributable to sources within the United
States and of the exact nature of all deductions from such
income, the Commissioner may never learn even of the
corporation's existence, and, in any event, he will probably be
unable to determine the correct amount of its taxable income.
The situation is pregnant with possibilities of tax evasion. In
express recognition of this fertile danger to the orderly
administration of the income tax as applied*57 to foreign
corporations, Congress conditioned its *120 grant of deductions upon
the timely filing of true, proper and complete returns. This is
in addition, of course, to the 25% penalty provided by Section
which either file no return or a late return unless "reasonable
cause" for the failure to file a timely return is shown. * * *
[
As to the "terminal date" that the Board had adopted in
The conclusion that the preparation of a return by the
Commissioner a reasonable time after the date it was due
terminates the period in which the taxpayer may enjoy the
privilege of receiving deductions by filing its own return, is
consistent not only with the intention of Congress * * * but
also with considerations of sound administrative procedure and
the generally accepted rule concerning*58 the number of returns
which may be filed.
This terminal date, which the Board of Tax Appeals first adopted
in
(1939), is directed against those foreign corporations which
instead of being induced voluntarily to advise the Commissioner
of their domestic operations, might find their interests best
served by filing no return whatever, and then waiting until such
time, if any, as the Commissioner discovers their existence and
acquires sufficient information about their income on which to %
base a return. Unless they are precluded from then obtaining the
deductions and credits under such circumstances, such foreign
corporation can, if detected, come in for the first time after
the Commissioner has made a return and suffer no economic loss
other than the general 25% late filing penalty which applies to
domestic as well as foreign corporations.
Without prescribing an absolute and rigid rule that whenever the
Commissioner files a return for a foreign corporation the
taxpayer is completely*59 and automatically denied the benefit of
deductions or credits, we yet hold that the facts of the instant
case justify a disallowance of deductions which petitioner might
otherwise have been entitled to claim, had it filed a timely
return in compliance with the statutory requirement.
[
The Court of Appeals for the Fourth Circuit also found in the legislative history of
It will thus be noted that
corporations, which made its first appearance in the Revenue Act
of 1928, 26 U.S.C.A. *121 Int. Rev. Acts, page 419, is almost
verbally identical with this section governing nonresident
aliens which has been a part of the revenue laws since 1918. The
application of
outset the Treasury Regulations have expressly provided that no
*60 deductions were allowable to nonresident aliens unless an
accurate and complete return was filed, and the filing of the
return by the Commissioner fixed the tax liability. * * *
* * * * * * *
The foregoing regulation [Article 311 of Treasury Regulations
45] states specifically that deductions are allowable to a
nonresident alien only if a return is filed, and, if no return
has been filed at the time the Commissioner prepares a return
for the taxpayer, the tax shall be assessed with no allowance
for deductions. Congress may be presumed to have adopted this
longstanding administrative construction when it enacted and
reenacted
The Court of Appeals for the Fourth Circuit distinguished its holding in
A substantially different*61 factual situation is presented in the
case before us. Here the Commissioner prepared a return only
after he had unsuccessfully made repeated requests to the
taxpayer to do so, and only after the taxpayer had flouted all
of these requests. Then, after the Commissioner had assessed a
deficiency on the basis of his return, but only then, the
petitioner filed its petition for review by the Board and also a
return.
Unless the deductions are here denied,
meaningless provision, for if, after the Commissioner has
earnestly attempted to obtain a return by the taxpayer and has
waited a reasonable time before filing his own return, the
taxpayer may still enjoy the privilege of all deductions and
credits, there is then no inducement to foreign corporations
voluntarily to file timely returns. In the absence of
demonstrable fraud, they will, by self-serving uncooperative
conduct, suffer no loss other than the general late filing
penalty which is applicable to domestic as well as foreign
corporations. Such a construction of the*62 statute would put a
premium on tax evasion and would reduce the administration of
the tax laws to mere idle activity. [
G. Georday Enters.
In
On the issues of the timeliness of Georday's federal income tax
return and the imposition of a 25% penalty, our decision in the
Blenheim case is determinative. The case for disallowance
of Georday's deductions is even stronger here because Georday
failed to file a return voluntarily not only after a return had
been filed for it by the Commissioner and after a deficiency
*63 letter had been sent to it, but even after a petition to the
Board had been filed. In point of time, Georday filed its return
more than five years after the date on which it was due.
Georday, therefore, clearly failed to file its return within the
reasonable terminal period prescribed in the Blenheim
case and is now precluded from obtaining the benefits of any
deductions it might have otherwise been entitled to claim had it
filed a timely return. * * *
H. Espinosa
While each of the previously discussed cases dealt with the applicability of former
On February 3, 1993, after the taxpayer had again failed to respond, the Commissioner notified the taxpayer that the Commissioner had filed substitute returns for the taxpayer for 1987 through 1991. On March 23, 1993, the Commissioner notified the taxpayer that the substitute returns had *123 been computed without the benefit of any deductions. On October 7, 1993, the taxpayer submitted Federal income tax returns for 1987 through 1991; apparently, these returns were never filed by the Commissioner. The returns reported net losses from rental properties located in the United States. On January 13, 1994, the Commissioner*65 issued a notice of deficiency to the taxpayer for 1987 through 1991. The Commissioner determined in the notice of deficiency that the taxpayer was liable for deficiencies and additions to tax as ascertained from the substitute returns. Pursuant to
This Court upheld the Commissioner's determination, deciding that a nonresident alien may not avoid the sanctions of
Respondent argues in this case that the
In the Anglo-American Co. case, it was held that the
phrase in
the manner prescribed in this title", did not mean within the
time prescribed in the titles of the respective acts and the
allowance of the credits and deductions otherwise allowable by
such acts was not dependent under
returns within the time prescribed by said acts.
Accord Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum Opinion of the Board of Tax Appeals dated April 13, 1939; Mills, Spence & Co. v. Commissioner, a Memorandum Opinion of the Board of Tax Appeals dated Oct. 5, 1938. In addition, the Court of Appeals for the Fourth Circuit in
Inasmuch as separate sections deal with "manner" and "time," we
think it highly improbable that Congress ever intended to
include the element of time in the section dealing primarily
with the manner of filing. We hold, therefore, that the mere
fact the return was not filed within the time prescribed by
preclude the allowance of deductions claimed.
I. Inverworld, Inc.
In
A. Background
The Secretary never issued regulations interpreting former
*70 B. 1957 Regulations
On October 23, 1957, the Secretary filed in the Federal Register the 1957 regulations interpreting
*126
-- * * *
(b) Resident foreign corporations. -- (1) Return necessary. A
resident foreign*71 corporation shall receive the benefit of the
deductions allowed to it with respect to the income tax, only if
it files or causes to be filed with the district director, in
accordance with section 6012 and the regulations thereunder, a
true and accurate return of its total income received from all
sources within the United States.
(2) Tax on gross income. If a return is not so filed, the tax
shall be collected on the basis of gross income, determined in
accordance with section 1.882-1 but without regard to any
deductions otherwise allowable.
C. 1990 Regulations
On December 10, 1990, the Secretary issued the 1990 regulations to amend
The 1990 regulations added to the 1957 regulations a general requirement that a foreign corporation file its Federal income tax return timely; i.e., generally before the 18-month deadline, in order to deduct its expenses for the year covered by the return. As respondent asserts in brief, a timely filing requirement was added because:
When Anglo-American and its progeny were decided, the
scale and nature of international business activity was markedly
different from today's modern business environment. At that
time, international travel was a time-consuming and cumbersome
endeavor. Transatlantic air travel was in its infancy, zeppelins
and cruise ships were the predominant means of travel. *73 Books and
records were in paper, not electronic form. Data and information
was transmitted via mail.
In the years since Anglo-American, there have been
dramatic changes and increases in the nature and level of
international business activity. International air travel is
commonplace, taking hours instead of days. Books and records are
now maintained in electronic form on computers. *127 Data,
information, and money are transmitted around the world in
electronic form. Businesses have instantaneous access to
information via the internet. Documents are delivered via
overnight delivery or by facsimile.
(2) Return necessary. A foreign corporation shall receive
the benefit of the deductions and credits otherwise allowed to
it with respect to the income tax, only if it timely files or
causes to be filed with the Philadelphia Service Center, in the
manner prescribed in subtitle F, a true and accurate return of
its taxable income which is effectively connected,*74 or treated as
effectively connected, for the taxable year with the conduct of
a trade or business in the United States by that corporation. *
* *
As to the inclusion of the timely filing requirement, the preamble to the 1990 regulations states in relevant part:
Commentators questioned the validity of the filing deadlines as
set forth in the proposed regulations. The filing deadlines were
not eliminated in the final regulations, however, since the
statute clearly provides for the*75 denial of deductions and
credits if returns are not filed in a timely manner. This
requirement is justified because of different administrative and
compliance concerns with regard to nonresident alien individuals
and foreign corporations. [
at 172,
Among the referenced commentators was the American Bar Association Section of Taxation (ABAST). See Letter from Holden, Chair, Section of Taxation, American Bar Association Section of Taxation (May 25, 1990), reprinted in 90 TNT 120-28 (June 7, 1990). The ABAST commented that the timely filing requirement was inconsistent with
D. 2002 Temporary Regulations
On January 28, 2002, the Secretary filed with the Federal Register the 2002 temporary regulations consisting of
E. 2003 Regulations
On March 7, 2003, the Secretary replaced the 2002 temporary regulations with the 2003 regulations. See
In the case of the subject returns, the 18-month deadlines are May 15, 1996, 1997, and 1998, respectively (i.e., 18 months after the 15th day of the sixth month after the close of the taxable year).
*129 VIII. Secretary's Authority To Issue Regulations
The Secretary may issue two types of regulations. See
Respondent acknowledges that the disputed regulations are interpretative regulations.
This Court*79 is empowered to invalidate a regulation that exceeds the authority of the Secretary to issue it. See, e.g.,
*81 An interpretative Federal tax regulation is reasonable under
A regulation may have particular force if it is a substantially
contemporaneous construction of the statute by those presumed to
have been aware of congressional intent. If the regulation dates
from a later period, the manner in which it evolved merits
inquiry. Other relevant considerations are the length of time
the regulation has been in effect, the reliance placed on it,
the consistency of the Commissioner's interpretation, and the
degree of scrutiny Congress has devoted to the regulation during
subsequent re-enactments of the statute. [
Following its decision in
When a court reviews an agency's construction of the statute
which it administers, it is confronted with two questions.
First, always, is the question whether Congress has directly
spoken to the precise question at issue. If the intent of
Congress is clear, that is the end of the matter; for the court,
as well as the agency, must give effect to the unambiguously
expressed intent of Congress.9 If, however, the court
determines Congress has not directly addressed the precise
question at issue, the court does not simply impose its own
construction on the statute, as would be necessary in the
absence of an administrative interpretation. Rather, if the
statute is silent or ambiguous with respect to the specific
issue, the question for the court is whether the agency's answer
is based on a permissible construction of the statute.
9 The judiciary is the final authority on issues of
statutory construction and must reject administrative
constructions which are contrary to clear congressional intent.
* * * If*83 a court, employing traditional tools of statutory
construction, ascertains that Congress had an intention on the
precise question at issue, that intention is the law and must be
given effect.
[
omitted).]
The question arises from the timing of these two decisions whether the Supreme Court intended for
*132 X. Review of the Disputed Regulations
A. Overview
We conclude that the timely filing requirement in the disputed regulations does not harmonize with the plain language, origin, or purpose of the relevant text of
B. Plain Meaning of the Relevant Text
We begin our analysis of the relevant text with the words used therein. We apply the plain meaning of the words used in a statute unless we find that a word's plain meaning is ambiguous. See
We agree with the holdings in
In the 1939 Code, when the relevant text was first codified, Congress again used the words "time" and "manner" together when it intended to include the meanings of both words in a single statutory provision. See, e.g., 1939 Code
In the 1954 Code, when Congress recodified the relevant text with a reference to "subtitle F", Congress continued to use the words "time" and "manner" together to express its intent to include both meanings in a single provision. See, e.g., 1954 Code
We believe that Congress acted intentionally and purposely when it included both "time" and "manner" in single sections of the referenced statutes but omitted the word "time" in favor of only the word "manner" in other single sections of those statutes; e.g., as in
*91 Respondent requests that we defer to the Secretary's interpretation of the word "manner" to include a timely filing requirement. We decline to do so. Because we find the meaning of the word "manner" as used in
*94 C. Application of Natl. Muffler
We also conclude that the Secretary's interpretation of a timely filing requirement is unreasonable under an analysis of the considerations discussed in
Our analysis of these considerations reinforces our conclusion that the disputed regulations are invalid. The regulations were issued in 1990, 62 years after the relevant text was enacted and 72 years after the enactment of the parallel provision of
As to the remaining two considerations, i.e., the degree of scrutiny that Congress has devoted to the regulation in question during subsequent reenactments of the statute and the reliance placed on that regulation, these considerations also do not support the Secretary's issuance of the disputed regulations. As to the former,
*99 For sake of completeness, we also note the legislative reenactment doctrine. Under that doctrine, Congress is presumed to have known of the administrative and judicial interpretations of a statutory term reenacted without significant change and to have ratified and included that interpretation in the reenacted term. See
This presumption is further supported by considering the setting of each of the reenactments of the relevant text following its interpretation by the judiciary. First, when the relevant text was codified in the 1939 Code, that text had recently been construed in
Third, as part of the Foreign Investors Tax Act of 1966, we note the substantial amendments which Congress made to
We also bear in mind the Foreign Investors Tax Act of 1966's legislative history, which adds to our understanding that Congress was then mindful of the interpretations set forth in
Respondent acknowledges that the disputed regulations are invalid if the relevant text is unambiguous in including no timely filing requirement. In contrast to the Secretary's statement in the preamble to the 1990 regulations, respondent argues that the caselaw*106 suggests that the relevant text is ambiguous. Respondent observes that some of this caselaw states that a foreign corporation must file a "timely" return in order to benefit from its deductions. Respondent notes especially the court's use of the word "timely" in
We disagree with respondent that the caselaw interprets the relevant text as including the Secretary's timely filing requirement. In
*108 D. Natl. Cable
In the recent case of
Given that the Supreme Court has historically reviewed Federal tax regulations primarily under the reasonableness test of
First, the issue in
Second, the Supreme Court in
Third, in
Fourth,
Moreover, apart from the previously mentioned differences, the Court in
In
Respondent with a citation to his nonacquiscence in
On the basis of the foregoing, we conclude that the disputed*117 regulations are invalid to the extent described herein. Given the plain meaning of the relevant text and the historical setting laid out in detail in this Opinion, including caselaw, legislation, legislative history, and regulations, the Secretary's adoption of a timely filing requirement and his attempted sub silentio overruling of contrary judicial and administrative precedents is unreasonable under
*119 We hold, contrary to respondent's determination, that
Decision will be entered for petitioner.
Reviewed by the Court.
GERBER, COHEN, WELLS, COLVIN, VASQUEZ, GALE, THORNTON, MARVEL, HAINES, GOEKE, WHERRY, and KROUPA, JJ., agree with this majority opinion.
CHIECHI and FOLEY, JJ., concur in result only.
SWIFT, J., dissenting: For the reasons explained below, I respectfully disagree with the majority opinion.
*149 (1) The majority opinion fails properly to distinguish the pre-1990 "no-regulation environment" of the cited court opinions from the environment or authority that came into existence upon promulgation in 1990 of
With regard to such a change in the regulatory environment applicable to a particular Federal law question, the Supreme Court recently stated in
allowing a judicial precedent to foreclose an agency from
interpreting an ambiguous statute * * * would allow a court's
interpretation to override an agency's. Chevron's premise
is that it is for agencies, not courts, to fill statutory gaps.
* * * The better rule is to hold judicial interpretations
contained in precedents to the same demanding Chevron
step one standard that applies if the court is reviewing the
agency's construction on a blank slate: Only a judicial
precedent holding that the statute unambiguously forecloses the
agency's interpretation, and therefore contains no gap for the
agency to fill, displaces a conflicting agency construction.
[Citing
Based on this recent Supreme Court explanation in Natl. Cable & Telecomm. Association of Chevron deference to be given Federal agency regulatory authority, I do not believe that 1930s and 1940s court opinions construing the predecessor of
In light of Natl. Cable, we should be focusing herein on an analysis of the reasonableness of the filing deadline reflected in
For the reasons set forth in the discussion below,
(2) The 1930s and 1940s court opinions adopted and applied a tax return filing deadline to the ability of foreign corporations to qualify for deductions and credits under the predecessor of
As the Board of Tax Appeals explained in
In view of such a specific prerequisite [that foreign corporate
taxpayers file tax returns] it is inconceivable that Congress
contemplated by that section that taxpayers could wait
indefinitely to file returns and eventually when the respondent
determined deficiencies against them they could then*123 by filing
returns obtain all the benefits to which they would have been
entitled if their returns had been timely filed. Such a
construction would put a premium on evasion, since a taxpayer
would have nothing to lose by not filing a return as required by
statute.
In light of the above 1939 clarification by the Board of Tax Appeals to its earlier 1938 opinion arguably to the contrary in
Thus, for more than 50 years, prior to 1990 when the regulation in issue herein was promulgated and since the 1939 issuance of the opinion of the Board of Tax Appeals in Taylor *151 Sec., Inc.,
It is true that this section contains no reference to a time
element. Nevertheless, we feel that the so-called normal tax
return filed by petitioner on Form 1120 was not a sufficient or
timely compliance with Section 233 [the predecessor of section
therein. * * *
The above "judicially recognized need" for a foreign corporate filing deadline (for purposes of allowing deductions and credits under
(3) The majority opinion's description of
Although it early on, see majority op. note 4, sets forth the language of
In that regard, the following explanation of the specifics of the filing deadline set forth in
For purposes of allowing deductions and credits under
Where a category 1 corporation files its tax return for the current year after the 18-month period, but before respondent notifies the taxpayer, the fixed 18-month filing deadline of the regulation would apply, and the regulation represents a shortening of the filing deadline that would have applied under Taylor Sec., Inc. and its progeny.
For purposes of allowing the deductions and credits under
For a category 2 corporation that files its tax return after the 18-month period but before respondent notifies the taxpayer, the 18- month filing deadline of the regulation would apply, and the regulation represents a shortening of the filing deadline that would have applied under Taylor Sec., Inc. and its progeny.
In effect, the filing deadline set forth in
As is evident, contrary to the majority opinion's contention that
It would seem obvious that the increased number of foreign corporation Federal income tax returns filed with respondent in today's world (as distinguished from the 1930s when the cases relied on by the majority opinion were decided) and the increasingly complex tax laws and tax administration applicable thereto would support, per se, respondent's effort, *154 by properly promulgated regulation, to modify and clarify, in the above modest manner, the return filing deadline that has been applicable to foreign corporations.
Further, it is appropriate to emphasize that the regulation at issue herein provides in
Lastly on this point, in 1938 respondent's litigating position in
In summary on this point, the filing deadline reflected in
(4) The majority opinion, see majority op. p. 77, suggests that
*155 (5) In its discussion of the legislative reenactment doctrine, see majority op. pp. 69-74, the majority opinion ignores a significant limitation on the legislative reenactment doctrine as follows:
[The legislative reenactment doctrine] does not apply where
nothing indicates that the legislature had its attention
directed to the administrative interpretation upon reenactment.
[2B Singer, Sutherland Statutory Construction section 49: 09 (6th
ed. 2000).]
*133 In this case, in reenacting
As the Court of Appeals for the Seventh Circuit explained in
However, neither * * * [the taxpayer] nor the tax court has
pointed to any occasion when Congress even mentioned the old --
or new -- regulation. This fact is important to the workings*134 of
the re-enactment doctrine for a relevant factor in a court's
review is "the degree of scrutiny Congress has devoted to the
regulation during subsequent re-enactments of the statute." * *
* [Citing
statutes involved in this area are too complex for us to venture
to assume Congress's intent through its silence. Therefore, we
choose to not second-guess the Treasury on this matter. The
Sixth Circuit was correct when it stated:
The re-enactment doctrine is merely an interpretive tool
fashioned by the courts for their own use in construing
ambiguous legislation. It is most useful in situations
where there is some indication that Congress noted or
considered the regulations in effect at the time of its
action. Otherwise, the doctrine may be as doubtful as the
silence of the statutes and legislative history to which it
is applied. * * * [Quoting
Cir. 1991), revg.
We also have applied this particular limitation to the legislative reenactment doctrine. In
*136 (6) Finally, rather than expressing sympathy for petitioner, see majority op. pp. 68, 72-74, whose Federal income tax returns were due on November 15 of each year, the fact that petitioner filed each of its 1993, 1994, 1995, and 1996 Federal corporate income tax returns on July 23, 1999, some 2-5 years after the return due dates and 9 years after
In conclusion, it is not respondent herein who is attempting to resurrect anything, see majority op. p. 84. Rather, it is the majority opinion that would resurrect
For the reasons stated, I respectfully dissent from this Opinion which invalidates
*157 HOLMES, J., agrees with this dissenting opinion.
HALPERN, J., dissenting:
I. IntroductionThis case involves the deference (if any) that we must show the Secretary of the Treasury's (Secretary's) construction of the Internal Revenue Code. The majority holds that we need show no deference to the Secretary's construction found in
In
First, always, is the question whether Congress has directly
spoken to the precise question at issue. If the intent of
Congress is clear, that is the end of the matter; for the court,
as well as the agency, must give effect to the unambiguously
expressed intent of Congress. * * * [I] f the statute is silent
or ambiguous with respect to the specific issue, the question
for the court is whether the agency's answer is based on a
permissible construction of the statute.
Id. (fn. ref. omitted). That approach was reaffirmed by the
Accordingly, the questions*139 in the instant case are: (1) Whether, in denying a foreign corporation an allowance for deductions and credits (without distinction, deductions) unless the foreign corporation files a true and accurate income tax return within the time limits set forth in
Before proceeding, it may be helpful to establish some terminology regarding the time for filing returns. I find the majority's use of the term "timely" confusing. For example, on page 4 of its report, the majority uses the term "timely" to mean both a return filed on or before the due date established by
If a foreign corporation files its income tax return on or before the due date prescribed in
In
In
[W]e are unable to conclude that in enacting
it was the intention of Congress that delinquent returns filed
by a foreign corporation after the respondent's determination
should constitute the returns required as a prerequisite to the
allowance of the credits and deductions ordinarily allowable to
the corporations. * * * In view of such a specific prerequisite
it is inconceivable that Congress contemplated by that section
that taxpayers could wait indefinitely to file returns and
eventually when the respondent determined deficiencies against
them they could then by filing returns obtain all the benefits
to which they would have been entitled if their returns*143 had been
timely filed. Such a construction would put a premium on
evasion, since a taxpayer would have nothing to lose by not
filing a return as required by statute.
More recently, in
*160 [W]hile
limit, the policy behind these provisions, as applied by the
case law, dictates that there is a cut-off point or terminal
date after which it is too late to submit a tax return and claim
the benefit of deductions. If no cut-off point existed,
taxpayers would have an indefinite time to file a return, and
these provisions would be rendered meaningless. * * *
As the above discussion suggests, no case has*144 said that
Having reached the second step in our sequential analysis, the question that we must answer is whether the timely filing rule found in
If Congress has explicitly left a gap for the agency to fill,
there is an express delegation of authority to the agency to
elucidate a specific provision of the statute by regulation.
Such legislative regulations are given controlling weight unless
they are arbitrary, capricious, or manifestly contrary *161 to the
statute. Sometimes the legislative delegation to an agency on a
particular question is implicit rather than explicit. In such a
case, a court may not substitute its own construction of a
statutory provision for a reasonable interpretation made by the
*146 administrator of an agency. [Fn. refs. omitted.]
To be more specific, we must determine whether the 18-month limitation found in
For the reasons stated, I would uphold
SWIFT, J., agrees with this dissenting opinion.
DISSENT OF JUDGE HOLMES
HOLMES, J., dissenting: The issue in this case is easy to understand.
*150 Upholding this regulation should be almost trivially easy. "So long as the Commissioner issues regulations that 'implement the congressional mandate in some reasonable manner, ' *163 * * * we must defer to the Commissioner's interpretation. Only if the code has a meaning that is clear, unambiguous, and in conflict with a regulation does a court have the authority to reject the Commissioner's reasoned interpretation and invalidate the regulation."
*151 I respectfully dissent, because today's opinion lays down new and misleading trails through three different parts of the jungle of administrative law:
o It misapplies the plain meaning rule;
o It greatly extends the doctrine of legislative reenactment to
overturn a regulation; and
o It rejects the recent teaching of the Supreme Court in
Brand-X 3 on the necessity of deferring to an
administrative agency's decision to issue a regulation
overturning caselaw.
I also write separately to highlight what I think is a serious confusion in the appropriate way we should review regulations that have gone through notice-and-comment rulemaking, especially those that change existing law. Much of the majority's exhaustive recitation of the history of
I.
The majority begins its analysis, as I agree we should, with the question of whether
But what materials should a court look at to decide whether a statutory phrase is unambiguous? The answer is in
*154 The majority crane their necks away from the actual words of
We understand that use [i.e., of the word "manner"] to refer to
items of information and not to refer to the time for the filing
of a return or the furnishing of any other document. We conclude
that Congress, by using only the word "manner" in*155 section
element of time.* * *
Majority op. pp. 61-62. 8
*156 This was also more or less the reasoning of our predecessor, the
This is hardly surprising. While*157 I agree that we should always construe the words of a statute to have their original public meaning, it is also true that we can -- indeed, we should -- recognize that even tax statutes are written against a background of common law legal usage. And it is generally *166 the case that when a legal instrument omits explicit time limits to do something permitted or required, it does not ordinarily mean that there are no time limits at all. See 1
I'm not saying that we need to canvass contract law to construe the Code, only suggesting that the observation that Congress used the word "manner" without specifying "time" is not the end of the argument. The context in which the word occurs suggests that imputation of a reasonable time limit is not a departure from the ordinary legal meaning of the word -- any more than imputation of a reasonable delivery time in a contract for delivery of specified goods, 1
The reason for imputing some time limits on filing returns or making elections is one of practical necessity. And this is where the majority's invocation of Anglo-American is so unintentionally radical, because the second problem with its discussion of the plain meaning of "manner" *159 is that it misunderstands the import of the many opinions from the 1930s and 1940s that in effect did set a filing deadline for foreign corporations if they wanted to qualify for deductions and other credits. The BTA's opinion in
As the Board of Tax Appeals explained in Taylor Securities:
In view of such a specific prerequisite [that foreign corporate
taxpayers file tax returns] it is inconceivable that Congress
contemplated by that section that taxpayers could wait
indefinitely to file returns and eventually when the respondent
determined deficiencies against them they could then by filing
returns obtain*160 all the benefits to which they would have been
entitled if their returns had been timely filed. Such a
construction would put a premium on evasion, since a taxpayer
would have nothing to lose by not filing a return as required by
statute.
The Fourth Circuit recognized long ago that Taylor Securities was an innovation.
Where our Opinion leaves the Commissioner after today's ruling is very unclear. 9 Current IRS practice, even when the Commissioner prepares a substitute return under
*162 II.
Having concluded that the plain language of
Applying National Muffler, the majority concludes that the regulation is out of tune with the statute not just because it fails to harmonize with
o is "not a 'substantially contemporaneous construction of the
statute, '"
o "merely adopted respondent's unsuccessful litigating
position,"
o "conflicts with the agency's previous interpretation of the
same statute,"
o had been in effect for only a short time before being
challenged,
o was not issued after a revision to
o was not relied on by petitioner to his detriment.
*163 See majority op. pp. 65-67.
Each of these statements is at least arguably true -- though it seems a stretch to say that a bright-line 18-month grace period is so substantially different from the old reasonable-time-before-letting- the-IRS-bring-the-curtain-down-by-filing-a-substitute-return test as to be in "conflict". And each of the factors the majority cites is concededly relevant in a National Muffler analysis. These counts, though, don't add up to a successful indictment of the regulation's reasonableness. For *169 what really seems to trouble the majority is that this regulation was promulgated years after
A.
According to the majority, the legislative reenactment doctrine means that "Congress is presumed to have known of the administrative and judicial interpretations of a statutory term reenacted without significant change and to have ratified and included that interpretation in the reenacted term." Majority op. p. 69. The majority then*164 marches through the history of the reenactments of
I don't agree that this is right formulation of the legislative reenactment doctrine, at least when it is used to invalidate, rather than uphold, a regulation. In a lengthy discussion of the doctrine, the D. C. Circuit held:
The district court mistakenly relied on the familiar notion that
Congress is presumed to be aware of administrative
interpretations of a statute or regulation when it adopts such
language in a statute. Though courts have stated this general
proposition, usually as a defense to a later attack against the
same interpretation, no case has rested on this
presumption alone as a basis for holding that the statute
required that interpretation.* * *
Even if we wanted to be pioneers, I am quite leery of the majority's formulation. Elsewhere in Brock, the D. C. Circuit summarized its understanding of the doctrine to require "express congressional approval of an administrative interpretation if it is to be viewed as statutorily mandated."
o "Mere reenactment is insufficient. It must also appear that
Congress expressed approval of the agency interpretation. That
is to say, the doctrine applies when Congress indicates *170 not
only an awareness of the administrative view, but also takes
an affirmative step to ratify it."
o "When the congressional discussion preceding reenactment makes
no reference to the * * * regulation, and there is no other
evidence to suggest that Congress was even aware of the * * *
interpretive position[,] 'we consider the * * * reenactment to
be without significance. '"* * * Am. Bankers Ins. Grp. v.
(quoting
See also
The majority's reliance on legislative reenactment should have ended when it could find no affirmative evidence that Congress knew of any of the Fourth Circuit or BTA cases that it describes. The legislative history that the majority quotes and summarizes features only vague references to "existing law." Majority op. p. 73.
Of course, the majority also describes at great length the absence of even a mention of a timely filing requirement in any of the various legislative histories that it pores through. They reason that the absence of any disagreement with the existing BTA and Fourth Circuit precedents shows that Congress intended to ratify those precedents. See majority op. pp. 70-71. This is an innovation. If taken seriously, it would freeze existing judicial constructions*167 and IRS regulations in place whenever Congress reenacted a portion of the Code, forcing us to treat them as if they were part of the statutory language and blocking the Secretary from changing regulations without persuading Congress to change the Code.
This cannot be right.
B.
The majority is, I think, also wrong about the amount of deference the Secretary owes to caselaw when he writes a regulation.
*171 This is the Brand-X problem. In that case, the FCC had issued a declaratory rule interpreting the term "telecommunications service" under its general authority to enforce the Telecommunications Act of 1934.
The Supreme Court began its analysis by citing the FCC's broad grant of regulation-writing power -- very similar to the Secretary's in section*168
A court's prior judicial construction of a statute trumps an
agency construction otherwise entitled to Chevron
deference only if the prior court decision holds that its
construction follows from the unambiguous terms of the statute
and thus leaves no room for agency discretion.* * *
The majority distinguishes Brand X in several ways:
o the FCC gave a more careful consideration of developments in
the field than the Secretary did here;
o Brand X did not involve a change in the agency's own
interpretation;
o the FCC was not a party in the court case whose holding it was
reversing; and
o the FCC's new regulation was promulgated only five years after
the contrary caselaw.
Majority op. pp. 78-81.
These distinctions should not make a difference -- the Supreme Court did not balance carefulness of consideration, *169 prior litigation history, or the amount of time that had passed between the caselaw and the new regulation. It simply looked to see if the agency had been delegated broad regulatory authority and whether its construction of an *172 ambiguous statutory phrase was reasonable.
III.
Finding the regulation unreasonable under National Muffler, even if
A.
The first issue is whether it is still correct to say, as we did ten years ago, that
we are inclined to the view that the impact of the traditional,
i.e., National Muffler standard, has not been changed by
Chevron, but has merely been restated in a practical two-
part test * * *
National Muffler -- at least as our Court has applied it -- requires a top-to-bottom review of the regulation to see*171 if it is in harmony with the "plain language of the statute, its origin, and its purpose."
*173 is a substantially contemporaneous construction of the statute
by those presumed to have been aware of congressional intent. If
the regulation dates from a later period, the manner in which it
evolved merits inquiry. Other relevant considerations are the
length of time the regulation has been in effect, the reliance
placed on it, the consistency of the Commissioner's
interpretation, and the degree of scrutiny Congress has devoted
to the regulation during subsequent re-enactments of the
statute. * * *
National Muffler gives great weight to the consistency of an agency's position over time, consistency with judicial prece- dent, 10 and any reliance interest the public might have developed. This makes a regulation that changes existing law more likely to be invalidated. And this is logical -- if a court has to consider factors focusing on the Secretary's justification for changing his position, there will be some cases*172 where they will be decisive. See, e.g.,
Chevron review places substantially less emphasis on justification for regulatory change. It expressly recognizes that there can be a range of permissible alternatives, and directs a court to decide only if the agency's regulation is "a permissible construction of the statute."
It's important to recognize that, in most cases, applying either National Muffler or Chevron will end up producing the same result -- when a statute is ambiguous, agencies do have considerable leeway in devising regulations that clarify the law. But the most important class of cases in which results under the two tests diverge is the one into which this case falls -- when an agency writes a regulation that changes existing law, either in the form of a previous regulation or judicial construction. The Supreme Court has consistently held that *174 Chevron allows such reversals. 11 Chevron is such an important case because it was so explicit in recognizing that resolution of ambiguities in a statute is more "a question of policy than of law. * * * When Congress, through express delegation or the introduction of an interpretive gap in the statutory structure, has delegated*174 policy- making authority to an administrative agency, the extent of judicial review of the agency's policy determinations is limited."
We have, in some cases at least, viewed the decision to analyze a*175 regulation under National Muffler as a mandate to undertake a review of the Secretary's legal analysis, construing "reasonableness" under National Muffler almost as meaning "the most reasonable construction." Compare the majority's analysis in today's Opinion to the minimal deference given regulations under
This "hard look" deference simply doesn't reflect the contemporary understanding of administrative law that regulations are a way to make policy choices, not just a way to interpret ambiguous statutory phrases. I agree with the majority that the judicial interpretations of
*175 My disagreement with the majority is not just a disagreement about how to apply National Muffler. Instead, I think the problem lies in a very subtle distinction between National Muffler and Chevron -- " reasonableness" using the National Muffler factors is taken to mean "is the Secretary construing the statute reasonably?," while under Chevron it means "is the Secretary behaving unreasonably by violating the statute in the course of exercising his delegated authority to set policy?" Both cases look to reasonableness, 12 but in different ways. The majority's condemnation of the Secretary's 18- month grace period, majority op. p. 62 note 17, illustrates this. It rhetorically asks: "Where that * * * rule came from, we do not know." Majority op. p. 62 note 17. The fact is that the Secretary routinely makes tax law more certain by using his regulatory authority under
*178 B.
This observation brings me to the next two issues today's decision raises -- should regulations issued under
*176 The key text here is the famous passage from Chevron where the Supreme Court said:
If Congress has explicitly left a gap for the agency to fill,
there is an express delegation of authority to the agency to
elucidate a specific provision of the statute by regulation.
Such legislative regulations are given controlling weight unless
they are arbitrary, capricious, or manifestly contrary to the
statute. Sometimes the legislative delegation to an agency on a
particular question is implicit rather than explicit. In such a
case, a court may not substitute its own construction of a
statutory provision for a reasonable interpretation made by the
administrator of an agency.
What is an "express delegation of authority to the agency to elucidate a specific provision of the statute by regulation?" And what is the*179 difference between reviewing a regulation to decide whether it is "arbitrary, capricious, or manifestly contrary to the statute" in contrast to a "reasonable interpretation?"
I'll discuss each in turn.
1.
The majority accurately states our Court's general rule -- if the Secretary issues a regulation under
Understanding the problem this causes requires a brief introduction into the ambiguity of the terms "interpretive" and "legislative" when used to describe regulations. In tax law, "legislative" regulations are those issued by the Secretary under a specific grant of authority in a particular Code section. "Interpretive" regulations, on the other hand, are all those regulations issued under the Secretary's general authority to prescribe all "needful rules and regulations." See sec.
*177 In administrative law, these same terms mean something different. Under the Administrative Procedure Act, "legislative regulations" are those that create new legal duties binding on the parties and the courts. Merrill & Watts, Agency Rules With the Force of Law: The Original Convention,
*181 There can be little doubt that, in this classification, both general and specific authority tax regulations are intended to bind the public and have the force of law. The IRS and Treasury use the same regulation-writing process for both general and specific authority regulations, subjecting both to the same painstaking review under the IRS's "Regulation Drafting Handbook," I.R.M. 32.1.5. Both types are issued as Treasury decisions, and both are signed by an Assistant Treasury Secretary and the IRS Commissioner. And when the Code penalizes taxpayers for "disregard of rules and regulations,"
Chevron's distinction between explicit and implicit congressional delegations of authority certainly doesn't reflect any difference between general and specific authority regulations. The Court there cited to four cases as examples of "express delegations."
o
parental support*182 or care by reason of the unemployment (as
determined in accordance with standards prescribed by the
Secretary),"
o
such income and resources as are, as determined in accordance
with standards prescribed by the Secretary, available to the
applicant,"
*178 • Communications Act of 1934,
its discretion, prescribe the forms of any and all accounts,
records, and memoranda,"
o
regulations as he may think fit for carrying into effect the
various provisions of any act relating to Indian affairs, and
for the settlement of the accounts of Indian affairs,"
The first two delegations*183 are the kind that tax lawyers would say lead to "legislative" regulations -- they are delegations of authority to fill in a gap in one particular section of a statute. But the second two delegations are entirely as broad as
To make the contrast sharper, consider the two cases cited by the Court in Chevron as examples of a "legislative delegation to an agency on a particular question [that] is implicit rather than explicit"
o
analyzing reviewability of the Attorney General's decision to
suspend deportation of an illegal alien under
1254(a)(1) if it would "result in extreme hardship * * *," and
o
reviewability of the EPA Administrator's approval of a state's
Clean Air Act plan under
adopted after reasonable notice and hearing."
Neither of these*184 two cases involved direct review of regulations at all, but instead were reviews of individual decisions by agencies in the course of which they had to construe disputed statutory terms.
In short, I think that the contrast that Chevron made was between review of regulations put through notice-and-comment rulemaking, and construction of statutory terms in the course of administrative adjudication. 15 Reading Chevron this way makes sense when one considers the Administrative *179 Procedure Act itself, which tells courts to use one standard in reviewing formal regulations -- are they "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law?,"
*185 Mead makes this clearer -- it says that the Court has "recognized a very good indicator of delegation meriting Chevron treatment in express congressional authorizations to engage in the process of rulemaking or adjudication that produces regulations."
*186 After Mead, I don't think it possible to draw distinctions between the deference owed tax regulations issued under
If applying Chevron*187 instead of National Muffler would lead to a different result, this discussion might still not matter -- National Muffler (and the pre-Chevron cases that relied on it,
But our Court has a special problem in trying to find the precedents it should follow -- appeals from our decisions go to twelve different courts of appeal, and the question of what review a general authority regulation issued under
The resulting circuit split was noted as long ago as 1998. See
o Second Circuit --
sides)
o Third Circuit --
deference to general authority regulations, but leaving open
possibility of considering the question); see also the nontax
cases
(Chevron deference applies to notice-and-comment
rules);
only Skidmore deference);
o Fourth Circuit --
(general authority regulations get National
Muffler review*189 under Chevron);
*181 • Fifth Circuit --
(National Muffler review rather than
Chevron);
o Sixth Circuit --
(Chevron review for "reasonableness");
o Seventh Circuit --
"reasonableness");
o Eighth Circuit --
o Ninth Circuit --
(Chevron arbitrary-and-capricious review);
o Tenth Circuit --
(National Muffler review)
o Eleventh Circuit --
review);
o*190 D. C. Circuit --
o Fed. Circuit -- Schuler Indus. Inc. v. United States,
2.
How would review of this regulation look under Chevron?
Here again, I think that Mead has clarified the law, by conflating the standard of "reasonableness" with the standard of "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." See
*191 On what "reasonableness" means in the post-Mead world, I generally agree with Judges Swift and Halpern. 19 The question is one of line-drawing, and substituting an 18-month*182 rule for an indeterminate and case-by-case consideration of the facts certainly seems reasonable. It does nothing more than substitute more definite deadlines for less definite ones and allows the Commissioner to trigger them by sending a notice rather than filing a substitute return.
I will only add a cite to
the agency has relied on factors which Congress has not intended
it to consider, entirely failed to*192 consider 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 ascribed to a difference in
view or the product of agency expertise.* * *
That is of course far from what happened here. The Secretary faced an ambiguous phrase in a Code section, unambiguously aimed at giving foreign corporations a major incentive to file their returns. He also learned by experience that some taxpayers would wait to file until a notice of deficiency was issued,
I respectfully dissent.
Swift, J., agrees with this dissenting opinion.
Footnotes
1. Unless otherwise noted, section references are to the applicable versions of the Internal Revenue Code of 1986. Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. As will be discussed, the relevant text of
sec. 882(c)(2) , "in the manner prescribed in subtitle F", is substantially the same as the related text of the predecessors tosec. 882(c)(2) . We refer interchangeably to the relevant text ofsec. 882(c)(2)↩ and the related text of its predecessors as the relevant text.3.
Sec. 6072↩ , entitled "Time For Filing Income Tax Returns", provides dates by which an income tax return must be filed in order to be timely.4. The regulations explain the 18-month deadline as follows:
For taxable years of a foreign corporation ending after July 31,
1990, whether a return for the current taxable year has been
filed on a timely basis is dependent upon whether the foreign
corporation filed a return for the taxable year immediately
preceding the current taxable year. If a return was filed for
that immediately preceding taxable year, or if the current
taxable year is the first taxable year of the foreign
corporation for which a return is required to be filed, the
required return for the current taxable year must be filed
within 18 months of the due date as set forth in section 6072
and the regulations under that section, for filing the return
for the current taxable year. If no return for the taxable year
immediately preceding the current taxable year has been filed,
the required return for the current taxable year (other than the
first taxable year of the foreign corporation for which a return
is required to be filed) must have been filed no later than the
earlier of the date which is 18 months after the due date, as
set forth in section 6072, for filing the return for the current
taxable year or the date the Internal Revenue Service mails a
notice to the foreign corporation advising the corporation that
the current year tax return has not been filed and that no
deductions (other than that allowed under section 170) or
credits (other than those allowed under sections 33, 34 and
852(b)(3)(D)(ii) ) may be claimed by the taxpayer. [Sec. 1.882- 4(a)(3)(i), Income Tax Regs.]↩
5. Petitioner also makes numerous other arguments which are pertinent only if the disputed regulations are valid. Given our holding herein that the disputed regulations are invalid, we need not and do not decide any of petitioner's other arguments.↩
6. Cervantes also prepared petitioner's Federal income tax returns for several years following the subject years.↩
7. Neither party has explained why the notice of deficiency does not address petitioner's 1993 taxable year.↩
8. Petitioner would have been required by
sec. 6012(a) , as interpreted bysec. 1.6012-2(a)(1) and(g)(1), Income Tax Regs. , to file a return for any taxable year in which it had asec. 882(d)(1)↩ election in effect. Such an election was in effect as to petitioner only during the subject years.9.
Sec. 7482(b)(1)(B)↩ provides rules as to venue for appeal by a corporation without a principal place of business, principal office, or agency in a judicial circuit. In such a case, venue is the United States Court of Appeals for the circuit in which is located "the office to which was made the return of the tax in respect of which the liability arises". Id. Because petitioner filed the subject returns in Philadelphia, Pa., an appeal of this case would appear to be to the Court of Appeals for the Third Circuit. As noted supra pp. 15-16, a foreign corporation such as petitioner was required before the enactment of the 1954 Code to file its Federal income tax returns at Baltimore, Md. Venue for appeal in that case was the Court of Appeals for the Fourth Circuit.10. The 1939 Code was approved and published on Feb. 10, 1939. See 53 Stat. iii. The 1939 Code "is an enactment without change of the 1939 edition of the Codification of Internal Revenue Laws prepared by * * * the staff of the Joint Committee on Internal Revenue Taxation, with the assistance of the Department of the Treasury and the Department of Justice." 53 Stat. iii. The underlying bill was introduced in the House Committee on Ways and Means on Jan. 18, 1939. See 53 Stat. iii.↩
11. The paucity of cases is not surprising. Before the enactment of the 1954 Code, all cases interpreting the predecessors of
sec. 882(c)(2)↩ were appealable to the Court of Appeals for the Fourth Circuit. See supra note 9. As will be discussed, the view of that court was set forth by the end of 1942 in three opinions. In addition, as also will be discussed, the Secretary's regulations construing the relevant text did not state until 1990 that a timely filed return was required as a condition to a foreign corporation's deducting its expenses.12. The "terminal period prescribed in the Blenheim case" (emphasis added) is the point where the Commissioner prepared a substitute return for the taxpayer.↩
13. Although the Commissioner in the notice of deficiency had characterized the taxpayer's rental income as effectively connected income, the Court was careful to note that neither party in that case had questioned whether the taxpayer had made a valid election to support that characterization. See
Espinosa v. Commissioner, 107 T.C. 146">107 T.C. 146 , 150↩ (1996).14. In addition to the three sets of regulations that were issued after the 1957 regulations, the Secretary in 1980 issued one other set of regulations (1980 regulations) that pertained to the 1957 regulations. See
T.D. 7749, 1 C.B. 390">1981-1 C.B. 390 . The 1980 regulations amended the 1957 regulations by adding a new paragraph (c), the substance of which is now reflected insec. 1.882-4(b), Income Tax Regs.↩ Because the 1980 regulations relate to a subject that is not relevant to our analysis, we make no further reference to them.15. A task force of the American Bar Association has recently concluded likewise that the Supreme Court primarily reviews interpretative Federal tax regulations under the analysis set forth in
Natl. Muffler Dealers Association v. United States, 440 U.S. 472, 99 S. Ct. 1304, 59 L. Ed. 2d 519 (1979) . See Salem et al., ABA Section of Taxn. Report of the Task Force on Judicial Deference,104 Tax Notes 1231">104 Tax Notes 1231↩ (2004).16. Legislative regulations, by contrast, are upheld "unless arbitrary, capricious, or manifestly contrary to the statute".
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837">467 U.S. 837 , 844, 104 S. Ct. 2778">104 S. Ct. 2778, 81 L. Ed. 2d 694">81 L. Ed. 2d 694↩ (1984).17. In fact, as to the 18-month period set forth in the regulations, it is not only arbitrary but without any statutory basis at all. As we understand the Secretary's formation of that period, it corresponds to 1 year after the 6-month extended due date of the return. See
T.D. 8322, 2 C.B. 172">1990-2 C.B. 172 , 172-173,55 Fed. Reg. 50827 (Dec. 11, 1990); see alsosec. 6081(a)↩ (generally allowing the Secretary to grant extensions of up to 6 months). Where that 1-year rule came from, we do not know.18. A term is ambiguous if it is "'capable of being understood in two or more possible senses or ways'".
Chickasaw Nation v. United States, 534 U.S. 84">534 U.S. 84 , 94, 122 S. Ct. 528">122 S. Ct. 528, 151 L. Ed. 2d 474">151 L. Ed. 2d 474 (2001) (quoting Webster's Ninth New Collegiate Dictionary 77 (1985)). Although the disputed regulations are contrary to our construction of the text, as is the construction of the relevant text by respondent, we do not believe that these contrary interpretations mean that the relevant text as of the issuance of the disputed regulations was reasonably capable of being understood in two or more senses or ways. The Treasury Department was not the first authoritative body to have interpreted the relevant text. That text had previously been construed on a number of occasions by both the Court of Appeals for the Fourth Circuit and the Board. In addition, contemporaneous to the seminal interpretation of the relevant text inAnglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938)↩ , Congress codified the text in the 1939 Code without any significant change from the text construed by the Board in Anglo-Am. Direct Tea Trading Co.. Then, after both the Court of Appeals for the Fourth Circuit and the Board had repeatedly and consistently construed the relevant text as not including a timely filing requirement, Congress recodified the relevant text in the 1954 and 1986 Codes, again without any significant change. Given the multiple legislative reenactments of the relevant text and the consistent and unanimous prior interpretations of that text by the Court of Appeals for the Fourth Circuit and the Board, we do not believe that the relevant text as of the time of the disputed regulations was reasonably capable of being understood in the sense advocated by respondent and adopted by the Secretary in the form of the disputed regulations.19. We include the Board in our references to the judiciary. Although the Board was established as "an independent agency in the executive branch of the Government", Revenue Act of 1924, ch. 234,
sec. 900(a) ,(k) , 43 Stat. 336, 338, the Court of Appeals for the Third Circuit has noted that the Board "for all practical purposes [was] a judicial tribunal operating in the federal judicial system".Stern v. Commissioner, 215 F.2d 701">215 F.2d 701 , 707-708 (3d Cir. 1954), revg. on other grounds21 T.C. 155">21 T.C. 155↩ (1953).20. The improper addition to the statute is easily seen by comparing
sec. 882(c)(2) withsec. 1.882-4(a)(2), Income Tax Regs. , as amended in 1990. The two sections are essentially the same, except that the regulation includes the word "timely". Respondent has not explained whysec. 1.882-4(a)(2), Income Tax Regs.↩ , as amended in 1990, stated that a return must be filed both "timely" and "in the manner prescribed in section F" if, as he argues, the concept of "time" is subsumed within the statutory phrase "in the manner prescribed in subtitle F".21. Absent a clear expression of legislative intent, we believe it unreasonable to conclude, as did the Secretary in the disputed regulations, that Congress intended for a foreign corporation to forfeit any deduction of its otherwise deductible ordinary and necessary business expenses simply because it filed its tax return untimely. Cf. S. Rept. 1707, 89th Cong., 2d Sess. 26-27 (1966),
2 C.B. 1055">1966-2 C.B. 1055↩ , 1076-1077 (noting as to nonresident aliens owning property in the United States that their "allocable deductions * * * may be relatively large" and that not allowing such deductions "may result in quite heavy tax burdens").22. The relevant meaning that we distill from the referenced cases of the Court of Appeals for the Fourth Circuit and the Board is twofold. First, a foreign corporation must file a tax return in order to deduct its expenses. Second, the Commissioner's preparation of a substitute return for the corporation is generally considered to be the corporation's return for Federal income tax purposes and divests the taxpayer of its entitlement to file a return for itself.↩
23. In fact, if anything is "clear", it is that the statute does not contain any time requirement and that the Secretary's inclusion of one in the disputed regulations is ultra vires.↩
24. Of course, the mere fact that the Secretary has changed his interpretation of a statutory term does not necessarily mean that the latter interpretation is invalid. See
Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 863 - 864 ;Dickman v. Commissioner, 465 U.S. 330">465 U.S. 330 , 343, 104 S. Ct. 1086">104 S. Ct. 1086, 79 L. Ed. 2d 343">79 L. Ed. 2d 343 (1984). Courts should accord considerably less deference, however, to an agency's statutory interpretation that conflicts with the agency's previous interpretation of the same statute. SeePauley v. BethEnergy Mines, Inc. 501 U.S. 680">501 U.S. 680 , 698, 111 S. Ct. 2524">111 S. Ct. 2524, 115 L. Ed. 2d 604">115 L. Ed. 2d 604 (1991);INS v. Cardoza- Fonseca, 480 U.S. 421">480 U.S. 421 , 446 n. 30, 107 S. Ct. 1207">107 S. Ct. 1207, 94 L. Ed. 2d 434">94 L. Ed. 2d 434↩ (1987).25. We have found no authority, nor has respondent cited any, to support respondent's position that the relevant text contains a timely filing requirement.↩
26. In fact, respondent concedes that Congress knows of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938)↩ , and that it is significant that Congress has never amended the relevant text after that case.27. The 1939 Code was enacted approximately 4 months after the release of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra.↩ 28. Respondent acknowledges that the terminal date in
Taylor Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939) ,Blenheim Co. v. Commissioner, 125 F.2d 906 (4th Cir. 1942) , affg.42 B.T.A. 1248 (1940) , andGeorday Enters. v. Commissioner, 126 F.2d 384">126 F.2d 384 (4th Cir. 1942), was the point where the Commissioner prepared a substitute return for the taxpayer. The Court of Appeals for the Fourth Circuit stated as to this point that it is consistent with, among other things, "the generally accepted rule concerning the number of returns which may be filed."Blenheim Co. v. Commissioner, supra at 910 . While the court also stated that this point is not an "absolute and rigid rule", we understand that statement to mean that a foreign corporation may in certain cases be entitled to benefit from its deductions where the Commissioner has prepared a substitute return for the corporation. In fact, had the Court of Appeals for the Fourth Circuit adopted such an "absolute and rigid rule" in Blenheim, its actions would have been inconsistent with its earlier holding inArdbern Co. v. Commissioner, 120 F.2d 424">120 F.2d 424 (4th Cir. 1941), modifying and remanding41 B.T.A. 910">41 B.T.A. 910↩ (1940), that the foreign corporation was entitled to its deductions even though the Commissioner had filed substitute returns for it.29. In
Ardbern Co. v. Commissioner, 120 F.2d at 426 (4th Cir. 1941) , the Court of Appeals for the Fourth Circuit noted that respondent had conceded that the taxpayer would have been entitled to its claimed deductions if the return which the taxpayer had attempted to file with the revenue agent had instead been filed with the Collector at Baltimore. The court, therefore, primarily limited its analysis of whether the statute included a timely filing requirement to the statement of the Board quoted supra p. 36. The court did point out, however, that no provision in the Revenue Act of 1934,ch. 277, 48 Stat. 680">48 Stat. 680 , precluded a late filing taxpayer who filed a return from receiving the benefit of the deductions to which the taxpayer was otherwise entitled. Seeid. at 426↩ .30. We note that this case is strikingly similar to
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938)↩ , where the taxpayer was allowed to receive the benefit of its deductions upon the untimely filing of returns more than 18 months after their due date. Indeed, the facts in support of an allowance of deductions are even stronger here. While the taxpayer in Anglo-Am. Direct Tea Trading Co. filed its returns only after respondent discovered that the returns were overdue, petitioner filed its returns before any contact from respondent.31. Congress is the only body that may amend the relevant text. Respondent makes no assertion that the Secretary ever asked Congress to amend the text to change the holding of
Anglo- Am. Direct Tea Trading Co. v. Commissioner, supra↩ , and its progeny that the text does not include a timely filing requirement. Nor have we found that such was the case. Instead, respondent invites this Court to take a fresh look at the relevant text in the light of the disputed regulations, to reject the judiciary's almost 70-year- old interpretation of that text, and to "incorporate [into the text] the timely filing concept as embodied in the regulation". Respondent asserts that not reading a timely filing requirement into the statute "is administratively unworkable * * * [in that it] would permit foreign taxpayers to live off the U.S. fisc indefinitely, file their returns only when 20-20 hindsight suggests it is in their own best interests to do so, and put the Service at an extreme disadvantage in performing its statutory duties." To say the least, such equitable arguments are made more appropriately to Congress than to the judiciary.1. I regard the notification to foreign corporations described in
sec. 1.882-4(a)(3)(i), Income Tax Regs. (that no tax return has been filed for the current year and that no deductions or credits undersec. 882(c)(2) will be allowed), as not materially different from the notification mentioned inTaylor Sec., Inc. v. Commissioner, 40 B.T.A. 696">40 B.T.A. 696 (1939), and its progeny (that respondent has prepared a substitute tax return or issued a notice of deficiency in which a corporation's deductions and credits undersec. 882(c)(2)↩ were not allowed).2. A vague statement in one of respondent's briefs that Congress "was aware of" the early Board of Tax Appeals and other court opinions is puzzling and ambiguous.↩
3. We also have stated that, "we do not believe that the legislative reenactment doctrine can be applied to bar reasonable amendments to regulations where * * * the change is made only prospectively from the date of the announcement of the proposed change."
Wendland v. Commissioner, 79 T.C. 355">79 T.C. 355 , 384 (1982), affd. sub nom.Redhouse v. Commissioner, 728 F.2d 1249">728 F.2d 1249 (9th Cir. 1984). Note the prospective only effective date of the regulation at issue herein, for taxable years ending after July 31, 1990.Sec. 1.882-4(a)(3)(i), Income Tax Regs.↩ 4. In
Boeing Co. v. United States, 537 U.S. 437">537 U.S. 437 , 448, 123 S. Ct. 1099">123 S. Ct. 1099, 155 L. Ed. 2d 17">155 L. Ed. 2d 17 (2003), the Supreme Court said of another Treasury regulation issued under the authority ofsec. 7805(a) : "Even if we regard the challengedregulation [sec. 1.861-8(e)(3) (1979), Income Tax Regs.] as interpretive because it was promulgated undersection 7805(a) 's general rulemaking grant rather than pursuant to a specific grant of authority, we must still treat the regulation with deference. SeeCottage Savings Assn. v. Commissioner, 499 U.S. 554, 560-561↩ (1991) ."5. I am not ready to join Judge Holmes in concluding that, in
United States v. Mead Corp., 533 U.S. 218">533 U.S. 218 , 121 S. Ct. 2164">121 S. Ct. 2164, 150 L. Ed. 2d 292">150 L. Ed. 2d 292↩ (2001), the Supreme Court "clarified the law, by conflating the standard of 'reasonableness' with the standard of 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. '" Judge Holmes's dissent p. 141.1. As Judge Swift↩ carefully explains, see dissent supra pp. 90-93, the disputed regulation is fairly complex and establishes a number of exceptions to the general 18-month rule; for simplicity's sake, I refer to the regulation as creating an 18-month grace period.
2. Our Court has met with limited success in finding regulations unreasonable after the extensive review of the sort we do today. See
Pac. First Fed. Sav. Bank v. Commissioner, 94 T.C. 101">94 T.C. 101 (1990) (invalidatingsec. 1.593-6A(b)(5)(iv), Income Tax Regs. after plenary review of statute and legislative history), revd.961 F.2d 800">961 F.2d 800 , 805 (9th Cir. 1992) ("we cannot usurp the Treasury's authority and invalidate the regulation unless it is an unreasonable construction"), disagreed with byPeoples Fed. S& L v. Commissioner, 948 F.2d 289">948 F.2d 289 , 300 (6th Cir. 1991) ("a court may not substitute its own construction for the reasonable interpretation of an agency"), disagreed with again byBell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d 224">40 F.3d 224 , 227 (7th Cir. 1994), revg.T.C. Memo. 1991-368 ("choice among reasonable interpretations is for the Commissioner, not the courts"), and finally abrogated,Cent. Pa. Sav. Association & Subs. v. Commissioner, 104 T.C. 384">104 T.C. 384 (1995); see alsoRedlark v. Commissioner, 106 T.C. 31">106 T.C. 31 (1996) (invalidatingsec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs. ,52 Fed. Reg. 48409 (Dec. 22, 1987) after plenary review of statute and legislative history), revd.141 F.3d 936">141 F.3d 936 (9th Cir. 1998) (using language quoted in text above), disagreed with byAllen v. United States, 173 F.3d 533">173 F.3d 533 (4th Cir. 1999) (regulation need not be "best possible means of implementing the statute" if it's reasonable), and disagreed again withKikalos v. Commissioner, 190 F.3d 791">190 F.3d 791 , 796-797 (7th Cir. 1999), revg.T.C. Memo. 1998-92 ("[i]t is not our role to determine the most appropriate interpretation of the statute, but simply to assess whether the regulation reflects a reasonable construction"), and finally abrogated,Robinson v. Commissioner, 119 T.C. 44">119 T.C. 44↩ (2002).3.
Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 546 U.S. 967, 125 S. Ct. 2688 (2005)↩ .4.
National Muffler Dealers Assn., Inc., v. United States, 440 U.S. 472 (1979)↩ .5.
Chevron U.S.A., Inc., v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)↩ .6.
United States v. Mead Corp., 533 U.S. 218">533 U.S. 218 , 121 S. Ct. 2164">121 S. Ct. 2164, 150 L. Ed. 2d 292">150 L. Ed. 2d 292↩ (2001).7. Whether a court should look to the text alone in deciding if a statute is ambiguous, as in Natl. R. R. Passenger, or to the text plus legislative history, as Chevron implies, see
Chevron, 467 U.S. at 842 , is a matter of some controversy. SeeCoke v. Long Island Care at Home, Ltd., 376 F.3d 118">376 F.3d 118 , 127 n. 2 (2d Cir. 2004) (collecting cases); see alsoTax Analysts v. Commissioner, 358 U.S. App. D.C. 385">358 U.S. App. D.C. 385 , 350 F.3d 100">350 F.3d 100, 103-104 (D. C. Cir. 2003);Hosp. Corp. of America & Subs. v. Commissioner, 348 F.3d 136">348 F.3d 136 , 144 (6th Cir. 2003) affg.107 T.C. 73">107 T.C. 73 (1996). It doesn't matter in this case because the legislative history ofsection 882↩ shows no congressional intent one way or the other about when a foreign corporation must file its return to avoid loss of deductions. See infra p. 122.8. The Code governs the "place" of filing returns as well as their "time" and "manner." Part VII of subtitle F has detailed rules, which the IRS has supplemented with extensive regulations.
Treas. Regs. 1.6091-1 ,20.6091-1 ,25.6091-1 ,31.6091-1 ,40.6091-1 ,41.6091-1 ,44.6091-1 ,53.6091-1 ,55.6091-1 ,156.6091-1 ,157.6091-1T ,301.6091-1 ,1.6091-2 ,1.6091-3 ,1.6091-4↩ . Given today's narrow reading of "manner prescribed under subtitle F," we may someday have to decide whether a return that a foreign corporation intentionally sends astray could trigger a loss of deductions.9. The majority seems to soften its analysis by suggesting at a couple points that the Commissioner can still enforce
section 882↩ by again preparing substitute returns. See majority op. pp. 65 note 22, 75. But the Opinion also states that this cannot be an "absolute and rigid rule." Majority op. p. 74 note 28.10. This seems to be a special concern for our Court. See, e.g.,
Ga. Fed. Bank v. Commissioner, 98 T.C. 105">98 T.C. 105 , 114 (1992) (later vacated and remanded) (regulations contrary to judicial precedents "created a greater inconsistency than they resolved");Redlark, 106 T.C. at 57↩ ("The nuts and bolts of this case is that the Commissioner continues to disagree with the pre-TRA judicial view"); see also majority op. p. 63 (deference unwarranted where Secretary has "total disregard to firmly established judicial precedent").11. See, e.g.,
Brand X, 545 U.S. ___, 125 S. Ct. at 2699 (2005) (agency reversal permissible as it is charged with interpreting ambiguous statutes);Smiley v. Citibank (South Dakota), N. A., 517 U.S. 735">517 U.S. 735 , 742, 116 S. Ct. 1730">116 S. Ct. 1730, 135 L. Ed. 2d 25">135 L. Ed. 2d 25 (1996) (prior contradictory agency position is not fatal);Rust v. Sullivan, 500 U.S. 173">500 U.S. 173 , 186-187, 111 S. Ct. 1759">111 S. Ct. 1759, 114 L. Ed. 2d 233">114 L. Ed. 2d 233 (1991) (changing circumstances require that an agency's position not be "carved in stone"). Of course, such changes are permissible under National Muffler too. (Indeed, National Muffler involved a regulation that changed existing law.440 U.S. at 481-483↩ .) But they would seem to be less probable because of the National Muffler factors that concentrate on consistency in the law over time.12. The Supreme Court's continuing citations to National Muffler after Chevron all stand for this general proposition. See
Boeing Co. v. United States, 537 U.S. 437">537 U.S. 437 , 451, 123 S. Ct. 1099">123 S. Ct. 1099, 155 L. Ed. 2d 17">155 L. Ed. 2d 17 (2003);United States v. Cleveland Indians Baseball Co., 532 U.S. 200">532 U.S. 200 , 219, 121 S. Ct. 1433">121 S. Ct. 1433, 149 L. Ed. 2d 401">149 L. Ed. 2d 401 (2001);Atl. Mut. Ins. Co. v. Commissioner, 523 U.S. 382">523 U.S. 382 , 389, 118 S. Ct. 1413">118 S. Ct. 1413, 140 L. Ed. 2d 542">140 L. Ed. 2d 542 (1998);Commissioner v. Estate of Hubert, 520 U.S. 93">520 U.S. 93 , 127, 117 S. Ct. 1124">117 S. Ct. 1124, 137 L. Ed. 2d 235">137 L. Ed. 2d 235 (1997);Newark Morning Ledger Co. v. United States, 507 U.S. 546">507 U.S. 546 , 576, 113 S. Ct. 1670">113 S. Ct. 1670, 123 L. Ed. 2d 288">123 L. Ed. 2d 288 (1993);Cottage Sav. Assn. v. Commissioner, 499 U.S. 554, 560-561↩ (1991) .13. Saltzman, IRS Practice & Procedure, 2d ed., par. 3.02[2]; sec. 601.601, Statement of Procedural Rules.↩
14. The confusing nomenclature prompted one academic to propose calling Treasury regulations issued under section 7805 "general authority" regulations, and Treasury regulations issued under other sections "specific authority" regulations. Coverdale, "Court Review of Tax Regulations and Revenue Rulings in the Chevron Era,"
64 Geo. Wash. L. Rev. 35">64 Geo. Wash. L. Rev. 35 , 55↩ (1995). I adopt this convention for the remainder of this Opinion.15. This is the consensus view in nontax fields. See Cunningham & Repetti, "Textualism and Tax Shelters,"
24 Va. Tax Rev. 1">24 Va. Tax Rev. 1 , 43-45↩ (2004).16.
Mead, 533 U.S. at 230 n. 12 . Many, perhaps most, of the cases cited in that footnote involve general authority regulations. E.g.Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1">529 U.S. 1 , 120 S. Ct. 1084">120 S. Ct. 1084, 146 L. Ed. 2d 1">146 L. Ed. 2d 1 (2000)[issued under42 U.S.C. sec. 1395cc(b)(2) ("Secretary may [act] * * * as may be specified in regulations")];United States v. Haggar Apparel Co., 526 U.S. 380">526 U.S. 380 , 119 S. Ct. 1392">119 S. Ct. 1392, 143 L. Ed. 2d 480">143 L. Ed. 2d 480 (1999)[issued under19 U.S.C. sec. 1502(a) (Secretary may "establish and promulgate such rules and regulations not inconsistent with the law")];AT& T Corp. v. Ia. Util. Bd., 525 U.S. 366">525 U.S. 366 , 119 S. Ct. 721">119 S. Ct. 721, 142 L. Ed. 2d 834">142 L. Ed. 2d 834 (1999)[issued under47 U.S.C. sec. 201(b) ("Commissioner may prescribe such rules and regulations as may be necessary")];United States v. O'Hagan, 521 U.S. 642">521 U.S. 642 , 117 S. Ct. 2199">117 S. Ct. 2199, 138 L. Ed. 2d 724">138 L. Ed. 2d 724 (1997)[issued under15 U.S.C. sec. 78j(b) (authorizing "rules and regulations as the [SEC] Commissioner may prescribe as necessary or appropriate")];Am. Hospital Assn. v. NLRB, 499 U.S. 606">499 U.S. 606 , 111 S. Ct. 1539">111 S. Ct. 1539, 113 L. Ed. 2d 675">113 L. Ed. 2d 675 (1991)[issued under29 U.S.C. sec. 156 ("authority from time to time to make, amend, and rescind * * * such rules and regulations as may be necessary")];Sullivan v. Everhart, 494 U.S. 83">494 U.S. 83 , 110 S. Ct. 960">110 S. Ct. 960, 108 L. Ed. 2d 72">108 L. Ed. 2d 72 (1990)[issued under42 U.S.C. 401 et seq. (Secretary authorized to "make rules and regulations and to establish procedures not inconsistent with this subchapter, which are necessary")];Massachusetts v. Morash, 490 U.S. 107">490 U.S. 107 , 109 S. Ct. 1668">109 S. Ct. 1668, 104 L. Ed. 2d 98">104 L. Ed. 2d 98 (1989)[issued under29 U.S.C. sec. 1135 ("the Secretary may prescribe such regulations as he finds necessary or appropriate")];K Mart Corp. v. Cartier, Inc., 486 U.S. 281">486 U.S. 281 , 108 S. Ct. 1811">108 S. Ct. 1811, 100 L. Ed. 2d 313">100 L. Ed. 2d 313 (1988)[issued under19 U.S.C. sec. 1526(d)(4)↩ ("Secretary may prescribe such rules and regulations as may be necessary")].17. See also Vermuele, "Mead in the Trenches,"
71 Geo. Wash. L. Rev. 347">71 Geo. Wash. L. Rev. 347 , 350 (2003) (notice-and-comment rulemaking a safe- harbor category); but seeCoke v. Long Island Care at Home, Ltd., 376 F.3d 118">376 F.3d 118 , 132 n. 5 (2d Cir. 2004); Merrill, "The Mead Doctrine: Rules and Standards, Meta-Rules, and Meta-Standards,"54 Admin. L. Rev. 807, 814-15↩ (2002) (notice-and-comment rulemaking begets Chevron deference only if regulation intended to have force of law). (That distinction wouldn't matter here, because general authority tax regulations are intended to have the force of law.)18. See also Sunstein, Law and Administration after Chevron,
90 Colum. L. Rev. 2071">90 Colum. L. Rev. 2071 , 2093 (1990) ("Chevron might be taken to suggest that whenever an agency is entrusted with implementing power -- whether to be exercised through rulemaking or adjudication -- agency interpretations in the course of exercising that power are entitled to respect so long as they are reasonable"). See alsoCHW West Bay v. Thompson, 246 F.3d 1218">246 F.3d 1218 , 1223↩ (9th Cir. 2001) (summarizing caselaw on Chevron step two as requiring reasonableness in substantive interpretation and in the process of making the decision).19. There is an extensive commentary on Chevron step-two standards. See Polsky, "Can Treasury Overrule the Supreme Court?,"
84 B.U.L. Rev. 185, 192 (2004) ; Cunningham & Repetti, supra n. 15,24 Va. Tax Rev. at 49↩ .