The regulatory authority of the Treasury Department to index capital gains for inflation: a sequel.

• Author: Cooper, Charles J.
• Position: Age of Austerity

INTRODUCTION I. SUMMARY OF 1992 ANALYSIS A. The Chevron Analytical Framework B. The Chevron "Step One" Analysis 1. The Statutory Text and the Meaning of "Cost" 2. The Legislative History 3. Relevant Caselaw C. The Chevron "Step Two" Analysis II. DEVELOPMENTS SINCE THE 1992 ANALYSIS A. Chevron Applies to Treasury Interpretations of the Code: Mayo Foundation B. Developments Affecting Application of the Chevron Test 1. The Meaning of Cost: Verizon Communications 2. Legislative Developments a. 1993-1994 b. 1995-1996 c. 1997-1998 d. 1999-2000 e. 2000-Present f. Capital Gains "Preferences" g. Implications of Legislative Developments 3. Judicial Decisions Construing the Code: Brand X CONCLUSION INTRODUCTION ***

The 1992 election witnessed the revival of one of the periodically recurring debates in the field of tax policy--whether the determination of taxable gain from the sale or exchange of a capital asset should be "indexed" to reflect the effect of inflation on the taxpayer's investment. What distinguished that debate from virtually all previous capital gains indexation debates was the overlay of a complex legal question on top of the usual economic and political considerations. Although the indexation debate previously focused almost exclusively on the wisdom of amending the Internal Revenue Code (the Code or I.R.C.) to require indexation, the 1992 debate introduced the legal issue of whether such a statutory amendment was even necessary. Could the Treasury Department (Treasury) simply adopt regulations allowing for capital gains indexation? Consideration of this legal issue obviously implicated intricate questions concerning the meaning of the Code's capital gains provisions and the deference to which any administrative reinterpretation of those provisions would be entitled in a court challenge.

During the summer of 1992, we were asked by the National Chamber Foundation, an affiliate of the United States Chamber of Commerce, to examine this legal issue. After conducting a comprehensive analysis of the Code and its legislative history, as well as of relevant principles of administrative law--with particular emphasis on the "Chevron doctrine"--we concluded that the Treasury would have the regulatory authority to index capital gains without an amendment to the Code. The principal foundation of our analysis was our conclusion that the term "cost" as used in the Code's capital gains provisions was ambiguous and was not plainly limited to historical cost--that is, the price originally paid for a capital asset. We also concluded that Congress's failure to enact various proposals that would have amended the Code to provide for indexation, as well as its enactment over the years of various other kinds of capital gains preferences, did not eliminate the ambiguity in the meaning of the pivotal term "cost" in the Code, nor did it otherwise foreclose the Treasury's ability to provide for indexation through the adoption of regulations. Our memorandum discussing the details of our legal analysis subsequently formed the basis of a law review article on the subject of administrative indexation of capital gains. (1) Though we direct the reader to the VTR article for the details of our comprehensive analysis, we provide a summary of that analysis in Part I of this Article.

We acknowledged in our 1992 analysis that the arguments against the Treasury's authority to reinterpret the Code to allow for indexation were substantial and that the legal question was a close and difficult one. As it turned out, the Department of Justice under the administration of President George H.W. Bush concluded that those arguments were not only substantial but insurmountable. In September 1992, the Office of Legal Counsel (OLC) prepared an opinion examining our analysis and concluding that the Code precludes administrative indexation (OLC opinion). (2) Shortly thereafter, and presumably on the basis of the OLC opinion (as well as a similar legal analysis undertaken by Treasury), President Bush decided against ordering administrative indexation. In our VTR article, which appends the OLC opinion in full, (3) we addressed the OLC opinion and explained why we believed the OLC's analysis was flawed and ultimately incorrect.

This Article is a sequel to our VTR article; its purpose is to identify any relevant legislative and jurisprudential developments that have taken place over the last twenty years and to assess their impact, if any, on the conclusions we reached in 1992. As discussed in Part II below, although the question remains a close one, it is not as close as it was in 1992. Post-1992 developments have substantially strengthened our original 1992 conclusions that the Code's capital gains provisions do not foreclose the Treasury from providing by regulation for the indexation of capital gains and that any such regulation would be entitled to deference under Chevron and analogous legal principles as a valid exercise of the Treasury's interpretative discretion. Moreover, although over the past twenty years Congress failed to enact bills providing for indexation and successfully enacted other types of capital gains "preferences," these legislative developments are no different in kind from similar pre-1992 developments and thus do not repeal or otherwise eliminate Treasury's discretion under the Code to provide for indexation by regulation.

Subsequent legal developments have strengthened support for our original conclusions in at least three respects. First, the Supreme Court, in Mayo Foundation for Medical Education and Research v. United States, recently confirmed that the Chevron doctrine applies to Treasury regulations interpreting the Code. (4) Second, in Verizon Communications Inc. v. FCC, the Court ruled (albeit in a different statutory context) that the meaning of the term "cost" is not at all plain and unambiguous and therefore can be reasonably interpreted to include costs other than historical cost. (5) In this regard, the Court's analysis in Verizon both tracks quite closely with our VTR article's examination of the meaning of the term "cost" in the Code and flatly rejects the central premise underlying the analysis in the OLC opinion. Finally, in National Cable & Telecommunications Ass'n v. Brand X Internet Services, the Court made clear that a previous court decision interpreting a statutory provision operates to deprive an agency of discretion to interpret the provision differently only if the judicial decision finds the provision to be unambiguous. (6) Because no previous judicial decisions conclusively hold that the term "cost" unambiguously precludes indexation, Brand X confirms that a Treasury reinterpretation of cost to provide for indexation would be entitled to Chevron deference notwithstanding prior lower court decisions adopting the historical "purchase price" interpretation of cost.

Before addressing in Part II these post-1992 developments in detail, we provide in Part I a brief sketch of the salient features of our 1992 analysis.

1. SUMMARY OF 1992 ANALYSIS

   1. The Chevron Analytical Framework

      At the outset of our 1992 analysis, we stressed that any challenge to a Treasury regulation providing for the indexation of capital gains would depend heavily on the standard of judicial review that would apply to such a regulation. (7) Modern administrative law doctrine makes clear that the legal question is not whether a court, were it reviewing the relevant provisions of the Code de novo, would conclude that indexation of capital gains is required under the statute or is even the best reading of the statute. (8) Rather, the question is whether a Treasury regulation indexing capital gains is based upon a permissible reading of the statute. (9) Obviously, an agency's statutory construction cannot be sustained if Congress has directly and unambiguously addressed the precise question at issue in a manner that forecloses the agency's interpretation. (10) Apart from this obvious constraint on an administrative agency's interpretive discretion, however, a court must defer to the agency's reading if it is a plausible and reasonable reading of the statute, even if the court's own de novo construction of the statute would differ from the agency's. (11)

      The modern framework governing judicial examination of an agency's interpretation of its organic statute was established in Chevron U.S.A. Inc. v. Natural Resources Defense Council. (12) Chevron's familiar two-step inquiry is worth repeating:

      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. 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 is sue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. (13) Thus, "[t]he court need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding." (14)

      The Chevron doctrine is premised on the notion that the agency, rather than a court, is the appropriate body to "fill any gap left, implicitly or explicitly, by Congress." (15) Significantly, this is true even when the agency interpretation reflects a change in the agency's views. (16) This conclusion follows from one of the central premises of the Court's analysis--namely, that the popularly elected Executive (or his designate) may adopt and implement reasonable policy choices...