The two most recent decisions of the Supreme Court involving federal taxes illustrate how a conservative approach to statutory interpretation tends to prevail, but only with great effort, and changing constituencies.
Hall v. United States
On May 14, 2012, the Court decided Hall v. United States. The petitioner was a Chapter 12 bankrupt farmer seeking a bankruptcy reorganization plan. However, in the course of the proceeding, the farmer sold his farm and recognized a gain that the IRS claimed incurred a tax of $29,000. The bankruptcy plan did not provide for payment of the tax and would have discharged it unpaid. The IRS asserted that the tax claim was nondischargeable and the Court agreed.
The reason for the dispute was a rather convoluted provision of the bankruptcy law that allowed the post-petition tax to be discharged only if it was “incurred by the estate.” The Court ruled it was not “incurred by the estate,” and reasoned that those words have a plain meaning, which is that the estate must be liable for the tax. The estate was not liable for this tax; the farmer was liable.
The Court determined liability fi rst by looking at the income tax law and then at the bankruptcy code: both said the estate in a Chapter 12 bankruptcy was not a separate taxable entity that was liable for its own taxes. The opinion of the Court might be said to have relied more on a tax law understanding of tax incurred than bankruptcy law.
That reliance perhaps explains why the Court’s ruling seems obvious enough to tax lawyers, who are familiar with the somewhat confusing dichotomy between the taxable Chapters 7 and 11 bankruptcy estates and the Chapter 13 (and now 12) estates that are not separately taxable.
However, the dissent of Justice Breyer, joined by Justices Kennedy, Ginsburg and Kagan, thought the majority’s interpretation was contrary to Congress’ intent. They relied principally on statements of Senator Grassley about what he had in mind, and on general concern for the farmer who would be saddled with the tax debt due to disposing of the farm that he could not operate profitably.
The outcome of this case and the two views represented by the two opinions can be characterized as a good example of “conservative” versus “liberal” statutory construction. Justice Sotomayor, writing for the Chief Justice and Justices Thomas, Scalia and Alito, interpreted the statute as she found it, not straining to relieve distressed farmers of the tax liability incurred on liquidating their farms. The minority mounted a strong effort based mainly on nuances and implications to reach a result that appears contrary to plain reading.
Peculiarly enough, Justice Breyer sided with the more traditionally conservative Justices in writing the plurality opinion in U.S. v. Home Concrete, 109 AFTR 2d 2012-1692. The Court ruled that the extended six-year statute of limitations did not apply to an omission of gross income through overstatement of basis because, even though gross income might be said to have been omitted, gross receipts were not omitted. The Court had ruled basically the same way in 1958 and the new opinion said stare decisis should prevail.
Stare decisis is a principle of conservative jurisprudence. It serves as an anchor to keep courts from re-deciding the same issue over and over and changing the law each time in the process. Again, Justices Roberts, Alito and Thomas were in the plurality and Justice Scalia actually agreed with them on the fundamental issue of regulations overturning court rulings, but did not join the plurality opinion although he concurred in the result.
How did Justice Breyer find himself on the conservative side of Home Concrete and the liberal side of Hall? Of course there is no way to know, but it is possible that the very different and important issue in Home Concrete led him to stare decisis as a crutch to avoid undermining the power of the courts.
Home Concrete is a Chevron issue case. The government wanted its 2010 regulation to trump the Court’s 1958 interpretation of the statute in order to assess tax on a 2001 return. Putting aside issues of retroactivity of the regulation, the real issue of the case was how far are courts going to step aside and allow federal agencies to say what the law is? It is not surprising that Justices Roberts, Alito and Thomas were on the side of courts saying what the law is, which is clearly the conservative side. Not much should be required to move others to that view (here, Justice Breyer) if they are concerned with the historic roles of courts in the federal system.
Justice Breyer said that if the statute is merely ambiguous and the ambiguity can be resolved with confi dence by normal statutory interpretation, then the court’s interpretation cannot be changed by a regulation, at least when the court is the Supreme Court. Conversely, when there is a gap in the statute, the agency can fi ll it with far more freedom.
Another decision this term involved such a gap: Mayo Foundation for Medical Ed. and Research v. United States, 562 U. S. ___ (2011). It confronted the question, “What is a full-time student when she also is a full-time employee?” That is a true gap in the statute that can go either way; the agency decided to call the full-time employee/student an employee and the court found that to be within the zone or reason.
These decisions show that it is hard to pigeonhole the Justices, but that conservative readings of tax laws tend to be the norm. Usually that favors the IRS.