Grapevine Imports, Ltd. v. United States

United States Court of Appeals
for the Federal Circuit
__________________________

GRAPEVINE IMPORTS, LTD., A TEXAS
LIMITED PARTNERSHIP, T-TECH, INC., A
TEXAS CORPORATION, AS TAX MATTERS PARTNER,
Plaintiffs-Appellees,

v.
UNITED STATES,
Defendant-Appellant.
__________________________

2008-5090
__________________________

Appeal from the United States Court of Federal
Claims in 05-CV-296, Judge Francis M. Allegra.
__________________________

Decided: March 11, 2011
__________________________

HOWARD R. RUBIN, Katten Muchin Rosenman, of
Washington, DC, argued for plaintiffs-appellees. With
him on the brief was ROBERT T. SMITH. Of counsel on the
brief were M. TODD WELTY and LAURA L. GAVIOLI, Son-
nenschein, Nath & Rosenthal, of Dallas, Texas; and
KENNETH J. PFAEHLER, of Washington, DC. Of counsel
was William E. Copley, Sonnenschein, Nath & Rosenthal,
of Washington, DC.
GRAPEVINE IMPORTS v. US 2

GILBERT S. ROTHENBERG, Acting Deputy Assistant At-
torney General, Appellate Section, Tax Division, United
States Department of Justice, of Washington, DC, argued
for defendant-appellant. With him on the brief were
JOHN A. DICICCO, Acting Assistant Attorney General, and
MICHAEL J. HAUNGS and JOAN I. OPPENHEIMER, Attorneys.

ROGER J. JONES, Latham & Watkins LLP, of Chicago,
Illinois, for amicus curiae Bausch & Lomb Incorporated.
With him on the brief were ANDREW R. ROBERSON; and
KIM M. BOYLAN, of Washington, DC.
__________________________

Before LOURIE, BRYSON, and PROST, Circuit Judges.
PROST, Circuit Judge.

The government appeals the U.S. Court of Federal
Claims’ judgment that the Internal Revenue Service’s
(“IRS’s”) 2004 administrative adjustment of Plaintiffs’
1999 partnership return was time-barred. Grapevine
Imports, Ltd. v. United States, 77 Fed. Cl. 505 (2007).
The question is whether administrative adjustments in
these circumstances are governed by the normal three-
year statute of limitations, or whether they are controlled
by a special six-year limitations period.

The Tax Code gives the IRS six years instead of three
to adjust a return when the return “omits” some item that
should have been included in “gross income.” Here, the
Plaintiffs are accused of overstating their basis in certain
capital assets via a tax shelter, and thus understating
income from those assets’ sale. The government argues
that basis overstatement is an “omission from gross
income” sufficient to trigger the extended limitations
period. Plaintiffs contend that it is not.
3 GRAPEVINE IMPORTS v. US

The Court of Federal Claims’ judgment relied on the
Supreme Court’s opinion in Colony, Inc. v. Commissioner
of Internal Revenue, 357 U.S. 28 (1958). In Colony, the
Supreme Court reviewed the precursor limitations statute
and held that overstatement of basis was not an “omission
from gross income,” and so did not trigger the extended
limitations period. Following that precedent, the Court of
Federal Claims granted judgment to Plaintiffs. In a
separate case on similar facts, another panel of this court
reached the same conclusion. Salman Ranch Ltd. v.
United States, 573 F.3d 1362 (Fed. Cir. 2009).

In the months following, the U.S. Department of the
Treasury issued new regulations disputing the reasoning
applied by the Court of Federal Claims, stating that the
Colony decision did not conclusively resolve the statute’s
interpretation, and holding that the limitations period—
properly interpreted—gave the government six years to
bring claims of this type.

Because we hold that the new Treasury regulations
are entitled to deference in interpreting the statutory
language, and because we hold that, under the regula-
tions’ interpretation, the government’s case is not time-
barred, we reverse the Court of Federal Claims’ judgment.

I. BACKGROUND

A. Grapevine and the Tigues

This is a tax case. The story, for our purposes, begins
in late 1999. Plaintiff Grapevine Imports, Ltd. (“Grape-
vine”) was a limited liability partnership with three
partners. Taxpayers Joseph J. Tigue and Virginia B.
Tigue, limited partners, each owned 49.5% partnership
shares. Plaintiff T-Tech, Inc. (“T-Tech”) owned the re-
GRAPEVINE IMPORTS v. US 4

maining 1% as a general partner, and was also the part-
nership’s tax matters partner. T-Tech, in turn, was
wholly owned by Mr. Tigue.

The Tigues purportedly arranged to sell Grapevine
(which owned an auto dealership) for upwards of $10
million. The government contends that the Tigues’ collec-
tive tax basis in Grapevine at that time was about $1
million, so the sale would have resulted in significant
taxable capital gains for the Tigues. From that starting
point, a series of transactions took place that changed the
tax picture significantly.

On December 9, 1999, the Tigues each sold short $5
million in U.S. Treasury Notes. 1 In a short sale, the
seller sells some security that he does not actually own,
normally by working with a lender to borrow securities at
a set fee or rate for some period of time. The seller sells
the borrowed securities; time passes. Then, just before he
is due to return the securities to the lender, the seller
buys equivalent securities using funds received from the
earlier sale. He gives the equivalent securities to the
lender, and the transaction is closed. See Zlotnick v. TIE
Commc’ns, 836 F.2d 818, 820 (3rd Cir. 1988) (describing
short sales).

In this case, the initial phase of the Tigues’ short sales
brought in $9,978,119. Before the sales were closed, the
Tigues conveyed these proceeds and the obligation to close
the short sales to Grapevine.

1 That the Tigues ran these transactions through
two wholly-owned limited liability corporations—one for
Joseph Tigue and one for Virginia Tigue—is not relevant
to this short summary.
5 GRAPEVINE IMPORTS v. US

In order to close the sales, Grapevine purchased
Treasury Notes on the open market having face value of
$10,000,003. Grapevine then conveyed the notes to the
lender, closing the short sale. Because Grapevine paid
more for the Treasury Notes than it received from the
Tigues, Grapevine recorded a $21,884 loss on the transac-
tion.

Shortly thereafter, on December 31, 1999, the Tigues
sold Grapevine for $11,017,146, and the proceeds were
delivered to the Tigues and T-Tech according to their
partnership interests.

Grapevine filed its 1999 partnership tax return on
April 19, 2000, showing a net short-term loss of $21,884
(attributable to the short sale). On or about April 17,
2000, the Tigues filed a joint federal income tax return in
which they reported a long term capital loss of $45,077
from their sale of Grapevine. The Tigues’ return claimed
a basis in Grapevine of $10,961,317.

The government contends that Grapevine and the
Tigues’ returns were improper. It contends that the
Tigues’ reported capital loss stemmed from an unlawful
overstatement of the Tigues’ basis in Grapevine. By
treating the conveyance of the short sale proceeds (the
$9,978,119) as increasing basis, but failing to apply a
corresponding basis reduction to account for Grapevine’s
new obligation to close the short sales, the Tigues man-
aged to dramatically increase their basis in the partner-
ship—and so reduce their capital gains—via economically
meaningless transactions. In other words, the govern-
ment accuses the Tigues, through Grapevine, of using a
“Son of BOSS [‘Basis and Options Sales Strategy’]” tax
shelter. See Kornman & Assocs. v. United States, 527
F.3d 443, 446 n.2 (5th Cir. 2008) (describing “Son of
GRAPEVINE IMPORTS v. US 6

BOSS” tax shelters); I.R.S. Not. 2000-44, 2000-2 C.B. 255
(further describing such shelters, and identifying them as
improper “listed transactions”).

On December 17, 2004, the IRS issued a Final Part-
nership Administrative Adjustment (“FPAA”) to T-Tech
that administratively reduced the Tigues’ basis in Grape-
vine by $10 million for 1999, thus requiring recomputa-
tion of the partners’ tax liability.

B. Judgment of the Court of Federal Claims

Grapevine challenged the FPAA in the Court of Fed-
eral Claims as untimely. 2 It argued that the Internal
Revenue Code’s statute of limitations for such adjust-
ments was three years, and the IRS’s adjustment was two
years too late. See I.R.C. § 6501(a) (2004) (setting forth a
general rule that the IRS may not assess tax more than
three years after the taxpayer’s return); id. § 6229(a)
(2004) (reflecting the three-year rule for tax attributable
to partnership items). 3 The government disagreed,

2 For convenience, the remainder of this opinion
uses the term “Grapevine” to mean both Grapevine and
its tax matters partner T-Tech.
3 In 2010, during this appeal’s pendency, Congress
made certain amendments to the Tax Code’s limitations
statutes. Hiring Incentives to Restore Employment Act,
Pub. L. No. 111-147, § 513, 124 Stat. 71, 111 (2010).
Congress stated that these amendments would affect
returns for which the limitations period had not yet
expired on the date of enactment, March 18, 2010, but
noted that such limitations period was to be computed
based on the pre-amendment statute. Id. § 513(d), 124
Stat. at 112. In this opinion, we therefore analyze the
2004 code to determine the limitations period for Grape-
vine’s 1999 return. We make no holding as to the effect, if
any, of the substantive amendments on Grapevine’s case.
7 GRAPEVINE IMPORTS v. US

contending that Grapevine’s overstatement of basis—
which led to understatement of gain, and so underpay-
ment of tax—triggered an extended six-year statue of
limitations. See I.R.C. §§ 6501(e)(1)(A), 6229(c)(2) (2004).

The Court of Federal Claims sided with Grapevine
and ruled the government’s attempt at adjustment time-
barred. The court noted that the Supreme Court had
analyzed the question of whether overstatement of basis
would lead to an extended limitations period under the
precursor statute. See Colony, Inc. v. Comm’r of Internal
Revenue, 357 U.S. 28, 32–38 (1958).

Colony was a fairly straightforward statutory inter-
pretation case. The taxpayer was a corporation in the
business of land sales. See Colony, Inc. v. Comm’r of
Internal Revenue, 26 T.C. 30, 31 (1956), rev’d, 357 U.S. 28
(1958). The corporation’s 1946 and ’47 tax returns over-
stated basis in certain land sales, and so understated the
corporation’s profits. The question was whether the IRS
could assess deficiencies on those returns more than three
but less than five years later (the extended limitations
period was then five years). Colony, 357 U.S. at 30.

The limitations statute interpreted in Colony resem-
bled the law at issue here:

SEC. 275. PERIOD OF LIMITATION UPON
ASSESSMENT AND COLLECTION.

Except as provided in section 276—

We note, however, that neither Grapevine nor the gov-
ernment contends that these amendments should affect
this appeal.
GRAPEVINE IMPORTS v. US 8

(a) General Rule.—The amount of income
taxes imposed by this chapter shall be as-
sessed within three years after the return
was filed, and no proceeding in court
without assessment for the collection of
such taxes shall be begun after the expira-
tion of such period.

...

(c) Omission from Gross Income.—If the
taxpayer omits from gross income an
amount properly includible therein which
is in excess of 25 per centum of the
amount of gross income stated in the re-
turn, the tax may be assessed, or a pro-
ceeding in court for the collection of such
tax may be begun without assessment, at
any time within 5 years after the return
was filed.

Internal Revenue Code of 1939 § 275, 53 Stat. 1, 86–87
(1939).

In determining whether the phrase “omits from gross
income” encompasses an overstated basis, the Supreme
Court noted, “[I]t cannot be said that the language is
unambiguous. In these circumstances we turn to the
legislative history of § 275(c).” Colony, 357 U.S. at 33.

Turning to that history, Colony found in the legisla-
tive reports a number of statements indicating that
“Congress merely had in mind failures to report particu-
lar income receipts and accruals, and did not intend the
five-year limitation to apply whenever gross income was
understated.” Id. at 35. The Court concluded that the
9 GRAPEVINE IMPORTS v. US

purpose of the extended limitations period was to give the
government extra time to discover items that had been
entirely omitted from returns—not to recover for items
that, though included, were misstated. Id. at 36. On that
basis, the Court held for the taxpayer and ruled that
overstatement of basis was not an “omission from gross
income.”

Returning to this case’s time before the Court of Fed-
eral Claims, Grapevine argued that Colony controlled,
and the government’s case was time-barred. The gov-
ernment tried to resist Colony’s application. It argued
that Colony properly applied only to income from the sale
of goods and services by a trade or business, and not other
income. 4 The basis of this argument was that the modern
Tax Code differs from the statute analyzed in Colony.
Notably, the updated code sets forth a test similar to that
in Colony—but explicitly limits that test to the “trade or
business” context. I.R.C. § 6501(e)(1)(A)(i) (2004).

The government argued that Colony should be simi-
larly limited to the “trade or business” context. It urged
that this was Congress’s intent, and pointed out that the
taxpayer in Colony was in the business of land sales. The
Court of Federal Claims disagreed, noting several reasons
why Colony still controlled even outside the “trade or
business” context. See Grapevine, 77 Fed. Cl. at 510–12.
The court also noted that the Supreme Court had dis-
cussed—briefly—§ 6501(e)(1)(A) in the Colony opinion:

And without doing more than noting the specula-
tive debate between the parties as to whether
Congress manifested an intention to clarify or to

4 This argument had achieved some traction in cer-
tain judicial decisions. See Grapevine, 77 Fed. Cl. at 509–
10 (recounting decisions questioning Colony’s reach).
GRAPEVINE IMPORTS v. US 10

change the 1939 Code, we observe that the con-
clusion we reach is in harmony with the unambi-
guous language of § 6501(e)(1)(A) of the Internal
Revenue Code of 1954.

Colony, 357 U.S. at 37. The 1954 revision to
§ 6501(e)(1)(A) brought the language to essentially its
modern posture. Consistent with the Supreme Court’s
note, the Court of Federal Claims went on to determine
that Congress’s enactment of § 6501(e)(1)(A) did not
operate to limit Colony’s holding.

Accordingly, on April 23, 2008, the court entered
judgment dismissing the government’s claims concerning
the 1999 tax return as time-barred. The government
timely appealed.

C. Salman Ranch and the New Regulations

Before briefing began, Grapevine moved to consolidate
this appeal with another Son of BOSS case then pending
before another panel, Salman Ranch Ltd. v. United
States, 573 F.3d 1362 (Fed. Cir. 2009). The government
opposed consolidation, but asked for this case to be held
in abeyance until the Salman Ranch case was decided on
the possibility that Salman Ranch would conclusively
resolve the time bar question. We agreed with the gov-
ernment and stayed briefing in this case.

The Salman Ranch opinion ably sets forth that case’s
progress before the court. Briefly put, the government
again argued that the Colony decision should be limited to
the context of income from the sale of goods or services by
a trade or business. Id. at 1371. The Salman Ranch
panel disagreed. It concluded that the Colony decision did
not turn on the taxpayer’s trade or business, and that
11 GRAPEVINE IMPORTS v. US

enactment of § 6501(e)(1)(A) did not mandate any differ-
ent result. Id. at 1373–77. Thus, the panel held for the
taxpayer and ruled the government’s claims time-barred.

Shortly after Salman Ranch issued, the Treasury De-
partment issued temporary regulations implementing the
Department’s own interpretation of the statute of limita-
tions and the statute’s interaction with Colony. Treas.
Regs. §§ 301.6229(c)(2)-1T, .6501(e)-1T, 74 Fed. Reg.
49,321 (Sept. 28, 2009). The Department subsequently
issued final regulations replacing the temporary regula-
tions. Treas. Regs. §§ 301.6229(c)(2)-1, .6501(e)-1, 75 Fed.
Reg. 78,897 (Dec. 17, 2010).

The preamble to the final regulations states: “The
Treasury Department and the Internal Revenue Service
disagree . . . that the Supreme Court’s reading of the
predecessor to section 6501(e) in Colony applies to sec-
tions 6501(e)(1) and 6229(c)(2) . . . .” 75 Fed. Reg. at
78,897. The regulations go on to set forth the Depart-
ment’s view that, outside the context of income from sale
of goods or services by a trade or business, “an under-
statement of gross income resulting from an overstate-
ment of unrecovered cost or other basis constitutes an
omission from gross income for purposes of 6501(e)(1)(A).”
Treas. Reg. § 301.6229(c)(2)-1(a)(1)(iii) (2010); see also
Treas. Reg. § 301.6501(e)-1(a)(1) (2010). In other words,
the new Treasury regulations set forth the view of Colony
that the government urged before both the Court of
Federal Claims in this case, and before the Salman Ranch
panel. They state that Colony did not conclusively resolve
the statutory interpretation issue, and that overstatement
of basis (outside the trade or business context) can trigger
the extended limitations period.
GRAPEVINE IMPORTS v. US 12

The government contends that the new Treasury
regulations should control the outcome of the present
appeal. Grapevine resists, arguing that the new regula-
tions cannot change this court’s interpretation of the
limitations statutes, and, even if they can, they do not
apply in this case.

II. DISCUSSION

A. Standard of Review

We have jurisdiction over this appeal from the Court
of Federal Claims’ final judgment pursuant to 28 U.S.C.
§ 1295(a)(3). We review that court’s grant of summary
judgment de novo. Pennzoil-Quaker State Co. v. United
States, 511 F.3d 1365, 1369 (Fed. Cir. 2008). Summary
judgment is appropriate where “there is no genuine issue
as to any material fact and [the movant] is entitled to
judgment as a matter of law.” R. Ct. Fed. Cl. 56(c)(1).

In this case, the underlying facts are not in dispute.
Our role is to resolve a question of pure statutory inter-
pretation. This is an issue of law, which we review de
novo. AD Global Fund, LLC v. United States, 481 F.3d
1351, 1353 (Fed. Cir. 2007).

B. Presence of Intervening Authority

The essential issue on appeal is whether this case is
governed by our decision in Salman Ranch. A panel of
this court is ordinarily bound to follow a prior preceden-
tial decision unless there are intervening circumstances,
such as new controlling authority. Tex. Am. Oil Corp. v.
Dep’t of Energy, 44 F.3d 1557, 1561 (Fed. Cir. 1995) (en
banc) (“This court applies the rule that earlier decisions
prevail unless overruled by the court en banc, or by other
13 GRAPEVINE IMPORTS v. US

controlling authority such as intervening statutory
change or Supreme Court decision.”).

The new Treasury regulations cannot, of course,
change the Tax Code. But they may reflect the Treasury
Department’s exercise of authority granted by Congress to
interpret an ambiguity in that code. Where an executive
department, entrusted with interpretive authority, prom-
ulgates statutory interpretations that are reasonable
within the circumstances established by Congress, then
the courts must defer to that interpretation. Chevron,
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837, 843–44 (1984).

There is at this point little doubt that the Treasury
Department has a Congressional mandate to interpret
ambiguities in the Tax Code, and that Treasury regula-
tions, when promulgated, are to be interpreted under the
standards set forth in Chevron. Mayo Found. for Med.
Educ. & Research v. United States, No. 09-837, slip op. at
11–12, 562 U.S. ___ (Jan. 11, 2011); see also Mead v.
United States, 533 U.S. 218, 229 (2001). Our task, there-
fore, is to examine the statute and the regulations to
determine the deference, if any, owed to the Treasury
Department in this appeal. In other words, we undertake
Chevron review of the new Treasury regulations. If the
Treasury regulations are entitled to Chevron deference,
then they are new intervening authority and may require
us to depart from Salman Ranch.

C. Applying Chevron

The Chevron analysis has two steps. First, we must
determine if there is an ambiguity in the statute such
that an agency has room to interpret. Second, we must
determine whether the agency’s action is a reasonable
GRAPEVINE IMPORTS v. US 14

interpretation of Congress’s intent. Chevron, 467 U.S. at
842–43.

1. Chevron Step One: Congress’s Intent Was
Not So Clear as to Foreclose Reinterpretation

Where a court, applying the traditional tools of statu-
tory construction, is unable to identify a “clear intent” by
Congress as to how a given question should be resolved,
that opens the door to an agency filling in the “gap” by
regulation. Chevron, 467 U.S. at 843. The search for
Congress’s intent begins with the plain statutory text. Id.
at 848–51; Nat’l Cable & Telecomm. Ass’n v. Brand X
Internet Servs. (hereinafter “Brand X”), 545 U.S. 967, 986
(2005) (“At the first step, we ask whether the statute’s
plain terms directly address the precise question at
issue.”) (quotation marks omitted); Torrington Co. v.
United States, 82 F.3d 1039, 1044 (Fed. Cir. 1996). If,
even after consulting the plain text, there is still some
question as to Congress’s intent concerning the given
question, we turn to the traditional tools of statutory
construction, e.g., legislative history, to see if they show a
clear intent that is unclear from the text alone. Chevron,
467 U.S. at 842–43; see also Torrington, 82 F.3d at 1044.

The Tax Code’s provision for an extended limitations
period when a return reflects a “[s]ubstantial omission of
items” reads:

(e) Substantial omission of items.—Except as oth-
erwise provided in subsection (c)—
(1) Income taxes.—In the case of any tax im
posed by subtitle A—
(A) General rule.—If the taxpayer omits from
gross income an amount properly includible
therein which is in excess of 25 percent of
15 GRAPEVINE IMPORTS v. US

the amount of gross income stated in the re-
turn, the tax may be assessed, or a proceed-
ing in court for the collection of such tax
may be begun without assessment, at any
time within 6 years after the return was
filed. For purposes of this subparagraph—
(i) In the case of a trade or business, the
term “gross income” means the total of the
amounts received or accrued from the sale
of goods or services (if such amounts are
required to be shown on the return) prior
to diminution by the cost of such sales or
services; and
(ii) In determining the amount omitted
from gross income, there shall not be
taken into account any amount which is
omitted from gross income stated in the
return if such amount is disclosed in the
return, or in a statement attached to the
return, in a manner adequate to apprise
the Secretary of the nature and amount of
such item.
I.R.C. § 6501(e)(1)(A) (2004).

The Tax Code includes similar language clarifying
that, where the “substantial omission of income” is attrib-
utable to a partnership item, the limitations period for the
taxpayer should not expire before six years after the
relevant date for the partnership return:

(a) General rule.—Except as otherwise provided in
this section, the period for assessing any tax im-
posed by subtitle A with respect to any person
which is attributable to any partnership item (or
affected item) for a partnership taxable year shall
GRAPEVINE IMPORTS v. US 16

not expire before the date which is 3 years after
the later of—
(1) the date on which the partnership return for
such taxable year was filed, or
(2) the last day for filing such return for such
year (determined without regard to extensions).
...

(c) Special rule in case of fraud, etc.—

...
(2) Substantial omission of income.—If any
partnership omits from gross income an
amount properly includible therein which is in
excess of 25 percent of the amount of gross in-
come stated in its return, subsection (a) shall
be applied by substituting “6 years” for “3
years”.
Id. § 6229(a)–(c)(2) (2004).

Grapevine contends that, under Colony and Salman
Ranch, these statutes’ meaning is clear: overstatement of
basis does not constitute an “omission from gross income.”
The government disagrees and argues that those cases do
not control this one. We think the government is correct.
Those cases, while instructive, do not resolve the question
for purposes of Chevron step one.

Both Colony and Salman Ranch preceded the issu-
ance of Treasury regulations interpreting this statute.
The task of those courts was therefore different from ours.
Their task was to weigh the evidence of the statute’s
meaning and to determine whether that evidence better
favored the taxpayer or the government. The goal was to
find the best (in each court’s view) interpretation of the
17 GRAPEVINE IMPORTS v. US

statute in light of the evidence. And in that inquiry, both
reached the same outcome—they held the taxpayers’
arguments against including overstated basis as an
“omission” stronger than the government’s argument in
favor, and interpreted the statute accordingly.

We face a different task in light of Chevron and Brand
X. The objective of Chevron step one is not to interpret
and apply the statute to resolve a claim, but to determine
whether Congress’s intent in enacting it was so clear as to
foreclose any other interpretation. See Brand X, 545 U.S.
at 982–83 (“Only a judicial precedent holding that the
statute unambiguously forecloses the agency’s interpreta-
tion, and therefore contains no gap for the agency to fill,
displaces a conflicting agency construction.”). If room
exists for more than one reasonable interpretation of
Congress’s intent, then the agency, not the judiciary, has
the interpretive mandate. The courts’ role is thereby
reduced to ensuring that the agency takes no action that
is unreasonably inconsistent with the statute. Id.; see
also Chevron, 467 U.S. at 843–44.

Looking at the relevant text of § 6229 and § 6501, we
find them ambiguous as to Congress’s intent concerning
treatment of a taxpayer’s overstated basis. Chevron, 467
U.S. at 842–43; see also Brand X, 545 U.S. at 986. This is
consistent with the analysis of both Colony and Salman
Ranch. In Colony, as noted supra, the Supreme Court
expressly found the predecessor statute ambiguous, and
turned to the legislative history to resolve the question.
357 U.S. at 33 (“[I]t cannot be said that the language [of
the statute] is unambiguous.”). And while it is true that
the Court later referred to the updated § 6501(e)(1)(A) as
“unambiguous,” it did not rely or elaborate on that state-
ment, nor was the updated statute at issue in that case.
Id. at 37. Further, in Colony the taxpayer was in the
GRAPEVINE IMPORTS v. US 18

business of land sales, so § 6501(e)(1)(A)(i)’s test for
income “in the case of a trade or business” expressly
applied. That is not the case here. The ambiguity con-
cerns what to do outside the trade and business context,
and the only language in § 6501(e)(1)(A) applicable out-
side the trade or business context is the same language
from the predecessor statute, “omits from gross income an
amount.” The Supreme Court previously noted that this
term was ambiguous as to whether it encompassed an
overstated basis. We therefore find Colony no bar to our
finding that the text of the relevant statutes, standing
alone, is ambiguous as to the disposition of this issue. 5

Nor does Salman Ranch mandate any different con-
clusion. This court there closely analyzed both the up-
dated statute and its legislative history to determine
whether divergence from Colony was warranted. 573
F.3d at 1373–77. It made no separate holding that the
statute was unambiguous for purposes of Chevron step
one, and indeed the panel’s resort to legislative history
strongly suggests that the statutory interpretation could
not be resolved on the statutory text alone.

5 In recent months, several of our sister circuit
courts have addressed this issue and reached varying
results. Compare Burks v. United States, No. 09-11061,
slip op. at 21–22 (5th Cir. Feb. 9, 2011) (declining to grant
Chevron deference because statute was unambiguous),
and Home Concrete & Supply, LLC v. United States, No.
09-2353, slip op. at 13–14 (4th Cir. Feb. 7, 2011) (same),
with Beard v. Comm’r of Internal Revenue, No. 09-3741,
slip op. at 12 (7th Cir. Jan. 26, 2011) (holding Colony non-
controlling in light of intervening statutory change and
noting appropriateness of Chevron deference); see also
Bakersfield Energy Partners v. Comm’r of Internal Reve-
nue, 568 F.3d 767, 775–78 (9th Cir. 2009) (holding, prior
to promulgation of regulations, that Colony controlled
interpretation of limitations period).
19 GRAPEVINE IMPORTS v. US

We thus conclude that the plain statutory text of
§ 6501(e)(1)(A) and § 6229(c)(2), standing alone, is subject
to multiple interpretations. As this court noted in Sal-
man Ranch, the Tax Code’s use of the term “omits” sug-
gests that the section is primarily addressed to the return
where the taxpayer has “fail[ed] to include or mention” or
“le[ft] out” some item rather than misrepresenting it (as
by an overstatement of basis). 573 F.3d at 1374 (quoting
Am. Heritage Dictionary of the English Language 1227
(4th ed. 2000)). But without looking beyond the text
itself, we cannot say that the statute forecloses the possi-
bility that a taxpayer’s overstated basis might constitute
an omission from gross income.

Having concluded that the text, standing alone, does
not resolve Congress’s intended treatment of basis over-
statement, we next must look to see if there are any other
indications of Congressional intent so clear that we per-
ceive no room for an agency to add anything. “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.” Chevron,
467 U.S. at 842–43; Brand X, 545 U.S. at 986.

Even incorporating the legislative history into our
analysis of the statutory text, we do not think Congress’s
intent was so clear that no reasonable interpretation
could differ. Colony reviewed much of the relevant Con-
gressional debate and committee reports for the 1934
Revenue Act. 357 U.S. at 33–35. Of the excerpts ana-
lyzed by the Supreme Court, none explicitly discussed
application of the limitations period to cases involving
overstatement of basis. The cited excerpts discuss the
situation of taxpayers who, whether “negligent,” “forget-
ful,” or “by honest mistake,” omit—not overstate the basis
of—items on their return. Id. The Court found these
GRAPEVINE IMPORTS v. US 20

excerpts “persuasive” to support its holding. Id. at 35.
The Court did not find that there was no other reasonable
interpretation of the history than its own, and neither do
we.

Salman Ranch’s review of the more recent legislative
history of § 6501 also cannot resolve the issue beyond
question. 573 F.3d at 1375–76. This court concluded
from the legislative history that Congress’s 1954 amend-
ments were primarily directed to the related issue of
whether omitted gross income exceeded 25% of stated
gross income, not whether basis overstatement was an
omission. Id. at 1376. While persuasive support of Sal-
man Ranch’s holding, the cited text cannot remove all
reasonable dispute about Congress’s meaning.

Accepting the soundness of the judicial reasoning in
Colony and Salman Ranch, it is not judicial clarity that
matters for step one of Chevron, but legislative clarity. If
the Tax Code lacks legislative clarity, and we hold that it
does, then there is room for agency interpretation. That
the Supreme Court and this court have strongly reasoned
for a certain interpretation of these statutes does not
mean their inherent ambiguity has been wiped away.
Brand X, 545 U.S. at 982 (“A court’s prior judicial con-
struction 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.”) (emphasis added).

We conclude that § 6501(e)(1)(A) and § 6229(c) are
ambiguous as to Congress’s intent for treatment of basis
overstatement outside the trade or business context. We
therefore conclude that the Treasury Department is
entitled to promulgate its own interpretation of these
21 GRAPEVINE IMPORTS v. US

statutes, and to have that interpretation given deference
by the courts so long as it is within the bounds of reason.

2. Chevron Step Two: The Treasury Regulations Are a
Reasonable Interpretation of the Limitations Period

The second step of the Chevron analysis asks whether
the newly issued Treasury regulations constitute “a
reasonable policy choice for the agency to make.” Chev-
ron, 467 U.S. at 845. Review of the Treasury regulations
reveals that they are reasonable, even though they depart
from the judicial interpretation of Colony and Salman
Ranch.

As it did before this court in Salman Ranch, the
Treasury Department justified its statutory interpreta-
tion with two basic arguments. First, the Department
viewed Congress’s addition of a special “gross receipts”
definition in the 1954 Internal Revenue Code as a re-
sponse to “disagreement among the courts that existed at
the time regarding the proper scope of section 275(c) of
the 1939 Internal Revenue Code.” Preamble to Temp.
Treas. Regs., 74 Fed. Reg. 49,321 (Sept. 28, 2009); see also
Preamble to Treas. Regs., 75 Fed. Reg. 78,897 (Dec. 17,
2010) (adopting the reasons set forth in the preamble to
the temporary regulations). By emphasizing the effect of
the “gross receipts” definition, the regulations purport to
better reflect Congress’s intention when compared to
Colony. Second, the Department argues that to apply
Colony outside the trade or business context risks render-
ing the “gross receipts” definition meaningless. It asks,
why would Congress enact a new definition for “gross
receipts” in the trade or business context if it had already
established (as Colony held) that that same definition
would apply in all contexts? Preamble to Temp. Treas.
Regs., 74 Fed. Reg. at 49,321–22.
GRAPEVINE IMPORTS v. US 22

Salman Ranch discussed these justifications and
found them non-persuasive, 573 F.3d at 1374–76, but we
are unable to say that they, or the policy they support, are
ipso facto unreasonable. It is beyond question that in
1954 Congress added provisions for computing gross
income in the trade and business context without ex-
pressly stating whether those provisions would also apply
to other contexts. One could, and in this case the Treas-
ury Department did, reasonably argue that this was
evidence of an intent to treat non-trade or business in-
come according to a different rule.

Grapevine opposes this conclusion, reasoning first
that an interpretation that departs from Colony cannot be
reasonable. Appellees’ Br. 42–43. For the reasons al-
ready set forth, we disagree. Colony’s holding does not
foreclose reasonable disagreement in agency rules under
Chevron. Neither that case nor Salman Ranch found
Congress’s intent was so clear as to support no reasonable
interpretation other than the taxpayer’s.

In its response brief, Grapevine also argues that the
temporary Treasury regulations should not receive Chev-
ron deference because of purported procedural shortcom-
ings in their issuance. Now that the regulations have
issued in final form, these arguments are moot. There
can be little doubt that the final regulations of the Treas-
ury Department are entitled to Chevron review and,
where appropriate, deference. Mayo Found., slip op. at 9–
10 (“We believe Chevron and Mead, rather than National
Muffler and Rowan, provide the appropriate framework
for evaluating the full-time employee rule [a Treasury
regulation promulgated after notice-and-comment proce-
dures].”); United States v. Cleveland Indians Baseball Co.,
532 U.S. 200, 219 (2001); cf. Fed. Nat’l Mortg. Ass’n v.
United States, 379 F.3d 1303, 1307–08 (Fed. Cir. 2004).
23 GRAPEVINE IMPORTS v. US

Because the Treasury regulations are a reasonable in-
terpretation of § 6501(e)(1)(A), they must receive our
deference. Chevron and Salman Ranch notwithstanding,
we will defer to the Treasury Department’s interpretation
in applying § 6501(e)(1)(A).

D. The Present Appeal

Grapevine contends that, even if the Treasury regula-
tions control application of the limitations period prospec-
tively, they should not control the present appeal.
Grapevine presents three arguments, which we address in
turn.

1. The New Treasury Regulations Apply to Previ-
ous Tax Years

Grapevine first contends that even if the new regula-
tions control assessments for future tax years, they do not
meet the legal requirements for retroactive application to
1999 tax assessments.

The Tax Code empowers the Treasury Department to
promulgate retroactive regulations:

(b) Retroactivity of regulations or rulings.—The
Secretary may prescribe the extent, if any, to
which any ruling or regulation, relating to the in-
ternal revenue laws, shall be applied without ret-
roactive effect.
GRAPEVINE IMPORTS v. US 24

I.R.C. § 7805(b) (1995); see also Redhouse v.
Comm’r of Internal Revenue, 728 F.2d 1249, 1250–
51 (Fed. Cir. 1984). 6

Grapevine claims that there is a “strong presumption
against” retroactive application of certain statutes and
regulations, citing Supreme Court cases from the non-tax
context as support. Appellees’ Br. 22–26; see also Land-
graf v. USI Film Prods., 511 U.S. 244 (1994); Bowen v.
Georgetown Univ. Hosp., 488 U.S. 204 (1988). Grapevine
urges us to undertake the various tests set forth in those
cases to review the Tax Code and the new regulations,
presumably out of due process and fairness concerns.

The government, on the other hand, points out that
the Supreme Court has long upheld the retroactivity of
tax legislation. See, e.g., United States v. Carlton, 512
U.S. 26, 30 (1994) (“This Court repeatedly has upheld
retroactive tax legislation against a due process chal-
lenge.”). Moreover, the Supreme Court specifically en-
dorsed the Treasury Department’s power to apply rules
and regulations retroactively under § 7805(b), on an
“abuse of discretion” standard:

[I]t is clear from the language of the section [pre-
cursor to § 7805(b)] and its legislative history that
Congress thereby confirmed the authority of the
Commissioner to correct any ruling, regulation or
Treasury decision retroactively[.]

6 The present statute places more extensive limits
on retroactivity. I.R.C. § 7805(b). But there is no dispute
that those limits do not apply to regulations concerning
pre-1996 statutory enactments. Taxpayer Bill of Rights 2,
Pub. L. No. 104-168, § 1101(b), 110 Stat. 1452, 1469
(1996). The statutory sections at issue here are in that
category.
25 GRAPEVINE IMPORTS v. US

Auto. Club of Mich. v. Comm’r of Internal Rev., 353 U.S.
180, 184 (1957) (footnote omitted); see also id. at 187
(applying abuse of discretion standard); Redhouse, 728
F.2d at 1251 (applying abuse of discretion standard to
retroactive rule). Further, we read Landgraf as empha-
sizing a requirement of clear Congressional intent for
retroactive application. 511 U.S. at 266 (“[A] requirement
that Congress first make its intention clear helps ensure
that Congress itself has determined that the benefits of
retroactivity outweigh the potential for disruption or
unfairness.”) Such an intent was manifest here, by
§ 7805(b)’s straightforward endorsement of retroactive
regulation.

We therefore must determine whether it was an
abuse of discretion for the Treasury Department to state
that the new regulations would apply to preceding tax
years. We conclude that it was not. As we have already
set forth above, the new regulations are a reasonable
interpretation of the limitations statutes. By their terms,
the new regulations will apply only to those taxpayers
who are within the limitations period as computed under
the new regulation, so there is no opportunity for these
regulations to reach into the distant past. And while we
recognize that some taxpayers whose past returns bear
evidence of overstated basis may find themselves facing
adjustments when they thought the limitations period
had lapsed, we cannot say that the burden on those
taxpayers is so great as to be an abuse of the Treasury
Department’s discretion. We therefore conclude that the
new regulations may properly be applied to returns from
past tax years whose limitations periods (as recomputed)
has not yet expired.
GRAPEVINE IMPORTS v. US 26

2. The Period for Assessing Grapevine’s 1999 Return
Remains Open until the Close of Litigation

Grapevine next argues that the Treasury regulations,
by their terms, do not apply to its 1999 return because the
regulations “appl[y] to taxable years with respect to which
the period for assessing tax was open on or after Septem-
ber 24, 2009.” Treas. Regs. §§ 301.6229(c)(2)-1(b),
301.6501(e)-1(e). Grapevine urges that the period for
assessing Grapevine’s tax closed on April 19, 2003, pur-
suant to the judgment of the Court of Federal Claims and
this court’s subsequent decision in Salman Ranch.
Grapevine repeatedly describes the Court of Federal
Claims’ decision as a “final judgment,” and contends that
it is not within the Treasury Department’s power to
contravene such a judgment.

The government responds that the Tax Code ex-
pressly extends the period of assessment being litigated
“until the decision of the court becomes final.” I.R.C.
§ 6229(d) (2004). “Final,” according to the government,
means for tax assessment purposes that all appeals have
been exhausted. Id. § 7481 (stating that a decision of the
Tax Court becomes final only after appeals have been
exhausted).

The government further notes that the preamble to
the final regulations makes clear that the regulations will
apply to entities in Grapevine’s position:

[T]he final regulations apply to taxable years with
respect to which the six-year period for assessing
tax under section 6229(c)(2) or 6501(e)(1) was
open on or after September 24, 2009. This in-
cludes, but is not limited to, all taxable years (1)
for which six years had not elapsed from the later
27 GRAPEVINE IMPORTS v. US

of the date that a tax return was due or actually
filed, (2) that are the subject of any case pending
before any court of competent jurisdiction (includ-
ing the United States Tax Court and Court of Fed-
eral Claims) in which a decision had not become
final (within the meaning of section 7481) or (3)
with respect to which the liability at issue had not
become fixed pursuant to a closing agreement en-
tered into under section 7121.

Preamble to Treas. Regs. §§ 301.6229(c)(2)-1, 301.6501(e)-
1, 75 Fed. Reg. at 78,898 (emphasis added). The empha-
sized clause, concerning pending litigation, is at issue
here.

Where, as here, a tax matters partner petitions a
court for readjustment of partnership items, the Tax Code
states that the limitations period is tolled “until the
decision of the court becomes final.” Id. § 6229(d)(1)
(2004). In such a case, the term “final” has the meaning
set forth in § 7481—that is, a decision is not “final” until
it is beyond further appeal. And although § 7481 speaks
in terms of a “Tax Court” decision not becoming final until
opportunities for appeal are exhausted, the Code is clear
that the same test applies where a partnership sues in
the Court of Federal Claims. I.R.C. § 6230(g) (“For pur-
poses of section 6229(d)(1) and section 6230(c)(2)(B), the
principles of section 7481(a) shall be applied in determin-
ing the date on which a decision of a district court or the
Court of Federal Claims becomes final.”).

Grapevine argues that decisions of the Court of Fed-
eral Claims are different from those of the Tax Court: the
Tax Court’s decisions become “final” when appellate
review is exhausted, but the Court of Federal Claims’
decisions are final when entered. As shown above, the
GRAPEVINE IMPORTS v. US 28

Tax Code clearly provides otherwise. We therefore hold
that the limitations period for Grapevine’s 1999 tax
return remains open until this case reaches unappealable
termination. It is open today, and it was open on Sep-
tember 24, 2009. As a result, by their plain terms the
new Treasury regulations apply to Grapevine’s 1999
return.

3. It is Not Improper to Apply the New Treasury
Regulations to Grapevine

Finally, Grapevine argues that the government is try-
ing to change the rules in the middle of the game. Having
failed to prevail at the Court of Federal Claims, and
having had the limitations period construed against it by
this court in Salman Ranch, Grapevine argues that the
Treasury Department should not be permitted to trans-
form a lower court loss into an appellate win via new
regulations.

While we understand Grapevine’s disappointment, we
disagree that this is an improper outcome. This case
highlights the extent of the Treasury Department’s au-
thority over the Tax Code. As Chevron and Brand X
illustrate, Congress has the power to give regulatory
agencies, not the courts, primary responsibility to inter-
pret ambiguous statutory provisions. That is what hap-
pened here. That the Treasury Department had not
exercised its interpretive authority over the relevant
language until after the Court of Federal Claims granted
summary judgment does not diminish the Department’s
authority, nor its right to have its interpretations, when
promulgated, respected by the judiciary—so long as they
are reasonable.
29 GRAPEVINE IMPORTS v. US

Further, the Supreme Court and this court have spe-
cifically affirmed the judiciary’s obligation to defer to
agency interpretations even when those regulations come
midstream in litigation. Smiley v. Citibank (S.D.), N.A.,
517 U.S. 735, 741 (1996) (“Nor does it matter that the
regulation was prompted by litigation, including this very
suit. . . . That it was litigation which disclosed the need
for the regulation is irrelevant.”); see also United States v.
Morton, 467 U.S. 822, 836 n.21 (1984); Motorola, Inc. v.
United States, 436 F.3d 1357, 1366 (Fed. Cir. 2006) (“It
makes no difference to our analysis that the regulation
was promulgated in 2002, after the controversy arose and
after this litigation began.”). Agencies retain this author-
ity even if they are parties to the litigation in which new
regulations are asserted as authority. See Morton, 467
U.S. at 836 n.21.

E. Application of the New Regulations to Grapevine

We therefore conclude that the Treasury Regulations
are new controlling authority that may change the Court
of Federal Claims’ judgment. Because there are no ques-
tions of material fact, our last task is to determine
whether either Grapevine or the government is entitled to
summary judgment as to the FPAA’s timeliness.

The Regulations state that the term “gross income,”
as used in the limitations statutes, has two possible
meanings depending on whether the income in question is
“from the sale of goods or services in a trade or business.”
Treas. Regs. §§ 301.6229(c)(2)-1 (a)(1)(ii)–(iii),
301.6501(e)-1 (a)(1)(ii)–(iii). Here, the understatement of
income stemmed from the sale of the partnership, not a
sale of goods or services in a trade or business, so the
latter definition applies:
GRAPEVINE IMPORTS v. US 30

(iii) For purposes of paragraph (a)(1)(i) of this sec-
tion, the term gross income, as it relates to any
income other than from the sale of goods or ser-
vices in a trade or business, has the same mean-
ing as provided under section 61(a), and includes
the total of the amounts received or accrued, to
the extent required to be shown on the return. In
the case of amounts received or accrued that re-
late to the disposition of property, and except as
provided in paragraph (a)(1)(ii) of this section,
gross income means the excess of the amount real-
ized from the disposition of the property over the
unrecovered cost or other basis of the property.
Consequently, except as provided in paragraph
(a)(1)(ii) of this section, an understated amount of
gross income resulting from an overstatement of
unrecovered cost or other basis constitutes an
omission from gross income for purposes of section
6229(c)(2).

Treas. Reg. § 301.6229(c)(2)-1 (a)(1)(iii); see also id.
§ 301.6501(e)-1 (a)(1)(iii) (stating same with respect to
I.R.C. § 6501(e)(1)(A)(i)).

The regulation’s effect is straightforward. It makes
clear that Grapevine and the Tigues’ overstatement of
basis “constitutes an omission from gross income” for
purposes of the limitations statutes. Applying that rule,
we conclude that Grapevine and the Tigues’ overstate-
ment of basis triggered the extended limitations periods
of § 6229(c)(2) and § 6501(e)(1)(A).

III. CONCLUSION

When the Court of Federal Claims entered judgment
for Grapevine, the Treasury Department had not yet
31 GRAPEVINE IMPORTS v. US

exercised its interpretive authority over the limitations
periods at issue in this case. It now has, and we, like the
Court of Federal Claims, are obliged to defer to that
interpretation. We therefore reverse the entry of judg-
ment for Grapevine and remand for further proceedings.

REVERSED AND REMANDED