Supreme Court Update: United States v. Home Concrete & Supply, LLC (11-139), Hall v. United States (10-875) and Order List

May 22, 2012 Supreme Court Update

Greetings, Court fans!

We are back with United States v. Home Concrete & Supply, LLC (11-139), a potentially significant administrative law decision masquerading as a ho-hum Internal Revenue Code statute of limitations case; Hall v. United States (10-875), where a divided Court wandered into the lush field of farm bankruptcy to hold that income tax liability incurred from a farm sale during bankruptcy is not dischargeable in a Chapter 12 bankruptcy proceeding; and two Orders. We should also report that the Court issued three more decisions today – the beginnings of the traditional end-of-Term deluge.

The question at hand in United States v. Home Concrete & Supply, LLC (11-139) was straightforward. The Internal Revenue Code extends the government's time to assess a deficiency against a taxpayer from 3 years to 6 years when a taxpayer "omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return." But does the government get the benefit of additional time when a taxpayer overstates his basis in property, thereby understating the gain he receives from its sale? A slim majority of the Court held that the government does not, applying the Court's interpretation of an earlier version of the provision in Colony, Inc. v. Commissioner (1958). If your only concern is the IRS' ability to get you for overstating your basis in property on a return filed more than 3 but less than 6 years ago, you can stop reading here. But if you're interested in what the members of a divided Court had to say about deference to administrative agencies – in this case, the Treasury Department, which issued a regulation taking the opposite position in 2010 – read on.

In Colony, the Court held that a 1939 Internal Revenue Code provision extending the government's limitations period when a taxpayer "omits" an amount did not apply when a taxpayer overstates his basis, because overstating basis does not "omit," or leave out, a specific item. The Colony Court found support for its reading in the legislative history, but acknowledged that the language was not "unambiguous." The Internal Revenue Code of 1954 reenacted an identical provision, but also contained changes to nearby provisions that arguably supported a finding that the government's limitations period was extended when a taxpayer overstated his basis. Flash forward to 2010: the Treasury Department promulgated a regulation that an understated amount of income resulting from an overstatement of basis constituted an "omission" from gross income. In seeking to assess a deficiency against the respondents in the present case, the Government argued that the Treasury regulation controlled because it was a reasonable construction of a statute the agency administered. A slim majority of the Court – Justice Breyer, the Chief, and Justices Thomas and Alito, joined by Justice Scalia for a fifth vote – rejected the Government's argument because "Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency."

Justice Breyer proceeded to express the views of the plurality – now minus Justice Scalia – on deference to agencies when a court has already interpreted a statute. The Government argued that the Treasury regulation should control notwithstanding Colony because, as the Court held in National Cable & Telecommunications Assn. v. Brand X Internet Services (2005), 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 the Colony Court had stated that the provision was not unambiguous. The plurality rejected the Government's position. In the plurality's view, the "underlying interpretive problem" was not whether a statute was ambiguous, but rather "whether, or when, a particular statute in effect delegates to an agency the power to fill a gap, thereby implicitly taking from a court the power to void a reasonable gap-filling interpretation." Chevron and later cases look to unambiguous language as a clear sign that Congress did not delegate gap-filling authority to an agency. Ambiguous language provides a "presumptive indication" that Congress did delegate gap-filling authority to an agency. But, as the Court stated in Chevron, "if 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," i.e., there is no gap left for the agency to fill. The plurality believed that the latter is what happened in Colony. True, Colony remarked that the statutory language was not "unambiguous," but given that Colony was decided nearly 30 years before Chevron, there was "no reason to believe that the linguistic ambiguity noted by Colony reflects a post-Chevron conclusion that Congress had delegated gap-filling power to the agency."

Justice Scalia pointedly did not join the plurality's analysis of agency deference. Scalia held to his view that Brand X was wrongly decided, because once a court has construed a statute de novo, "there no longer is a different construction that is consistent with the court's holding and available for adoption by the agency." Scalia joined in the judgment of the Court insofar as Colony had construed the statute at issue, and that construction controlled. But he criticized the plurality for trying to "add yet another lopsided story to the ugly and improbable structure that our law of administrative review has become." By Scalia's reading, the plurality would permit Brand X gap-filling in post-Chevron cases as long as they determined that an ambiguity existed, but would allow the same gap-filling in pre-Chevron cases only when they took the additional step of determining that Congress wanted the agency to resolve that particular ambiguity. "Rather than making our judicial-review jurisprudence curiouser and curiouser," Scalia would have the Court abandon Brand X, "the opinion that produces these contortions."

Justice Kennedy wrote for the dissent, joined by Justices Ginsburg, Sotomayor, and Kagan. The dissenters focused on the other changes Congress made in 1954, which Colony did not address, and found that the "amended statute leaves room" for the Treasury Department's interpretation. In the dissenters' view, this was not the case in which to resolve lingering questions from Brand X. While the Court had interpreted the same language in Colony, that language was in a predecessor statute without Congress' later additions: "There is a serious difficulty to insisting, as the Court does today, that an ambiguous statute must continue to be read the same way even after it has been reenacted with additional language suggesting Congress would permit a different interpretation. Agencies with the responsibility and expertise necessary to administer ongoing regulatory schemes should have the latitude and discretion to implement their interpretations of provisions reenacted in a new statutory framework."

In Hall v. United States (10-875), the Justices turned their sights to Chapter 12 of the Bankruptcy Code, which allows farmer debtors with regular annual income to adjust their debts by filing reorganization plans. To win approval, plans generally must provide for the full payment of priority claims. But 11 U.S.C. § 1222(a)(2)(A) creates an exception for certain governmental claims that arise from the disposition of farm assets used in the debtor's farming operation, including "any tax incurred by the estate." Section 1222(a)(2)(A) downgrades these claims to general, unsecured status and makes them dischargeable with less than full payment. Petitioners Lynwood and Brenda Hall sold their farm shortly after initiating Chapter 12 bankruptcy proceedings. The IRS claimed they owed $29,000 in federal income tax from the sale. The Halls tried to treat the income tax as an unsecured claim, but the IRS objected, saying that income tax from a post-petition farm sale is not dischargeable in bankruptcy. A ping-pong match ensued: the Bankruptcy Court sided with the IRS, but the District Court reversed, and then the Ninth Circuit reversed again, holding that a Chapter 12 estate does not "incur" federal income taxes because it is not a separate taxable entity under the Internal Revenue Code. In so doing, the Ninth Circuit created a circuit split over what it means for a tax to be "incurred by the estate."

The majority – Justice Sotomayor, joined by the Chief and Justices Scalia, Thomas, and Alito – affirmed the Ninth Circuit. It concluded that a tax "incurred by the estate" must be one for which the estate itself is liable. In a Chapter 12 bankruptcy – unlike its Chapter 7 and 11 cousins – there is no separately taxable estate. Instead, the debtor, not the trustee or estate, is liable for taxes. The Halls' post-petition tax liability thus was not "incurred by the estate" and was not dischargeable in the Chapter 12 reorganization plan. The majority arrived at this conclusion quickly, then supported its holding with a lengthy discussion of IRC and Bankruptcy Code provisions, legislative history, and statutory structure.

Justice Breyer wrote for the dissenters. The dissent stressed the purpose of Chapter 12: to allow "indebted family farmers (and fishermen) [to] keep their farms by making commitments to pay those debts (in part) out of future income." Only farmers with sufficient assets and income may qualify to proceed under Chapter 12. If a post-petition tax debt to the government falls outside the bankruptcy proceedings, debtors' assets may be so depleted by priority payments to the government that they are ineligible to proceed under Chapter 12 at all. According to the dissent, Congress plainly intended that post-petition tax liabilities like the Halls' could be reduced to unsecured status – just as pre-petition tax claims may be – and discharged under the bankruptcy plan. Justice Breyer offered evidence from the mouth of the amendment's sponsor that reducing the IRS's priority during bankruptcy proceedings would prevent it from "veto[ing] a farmer's reorganization plan." As to the meaning of "incurred by the estate," the dissent argued that just because the tax law doesn't consider a Chapter 12 bankruptcy estate to be a separate taxable entity, it does not necessarily follow that the Bankruptcy Code should follow suit. Because the bankruptcy estate exists at the time the tax is incurred and because the bankruptcy court has jurisdiction over the farmer's assets at that point, "one can consider a tax liability that the farmer incurs during [the bankruptcy] . . . as a liability that, in the bankruptcy sense, the estate incurs." But, in the end, whether "one can consider" things to be as the dissenters prefer, they fell one vote short.

In other news, the Court granted cert in Chaidez v. United States (11-820), which asks whether the Court's decision in Padilla v. Kentucky (2010) – that criminal defendants receive ineffective assistance of counsel under the Sixth Amendment when their attorneys fail to advise them that pleading guilty to an offense will subject them to deportation – applies to persons whose convictions became final before Padilla.

The Court has also granted cert in Clapper v. Amnesty International USA (11-1025), regarding Section 702 of the Foreign Intelligence Surveillance Act of 1978, 50 U.S.C. § 1881a (Section 1881a), which allows the Attorney General and Director of National Intelligence to authorize jointly the "targeting of [non-United States] persons reasonably believed to be located outside the United States" to acquire "foreign intelligence information." The case asks whether United States persons who may not be targeted for surveillance under Section 1881a have Article III standing to seek a declaration that Section 1881a is unconstitutional and an injunction permanently enjoining any foreign-intelligence surveillance from being conducted under it.

We'll be back soon with today's decisions.

Kim & Jenny

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400