Legal Authority of the Department of the Treasury to Issue Regulations Indexing Capital Gains for Inflation, 92-14
| Decision Date | 01 September 1992 |
| Docket Number | 92-14 |
| Citation | 16 Op. O.L.C. 136 |
| Court | Opinions of the Office of Legal Counsel of the Department of Justice |
| Parties | Legal Authority of the Department of the Treasury to Issue Regulations Indexing Capital Gains for Inflation |
TIMOTHY E. FLANIGAN Assistant Attorney General Office of Legal Counsel
Legal Authority of the Department of the Treasury to Issue Regulations Indexing Capital Gains for Inflation The Department of the Treasury does not have legal authority to index capital gains for inflation by means of regulation.
You have asked for our opinion whether the Department of the Treasury ("Treasury") has legal authority to amend its regulations to index capital gains for inflation. In connection with that request, you have provided us with your legal opinion concluding that Treasury does not have such authority. Opinion of the General Counsel (Aug. 28, 1992) ("Treasury Memorandum") In reaching that conclusion, you consider in detail, and specifically reject arguments presented by the National Chamber Foundation in the form of a legal memorandum prepared by its private counsel which concludes that Treasury has such legal authority. See Memorandum for Dr. Lawrence A. Hunter, Executive Vice President, National Chamber Foundation, by Charles J Cooper, et al. (Aug. 17, 1992) ("NCF Memorandum").
We have carefully reviewed the arguments set forth in the Treasury Memorandum and the NCF Memorandum. As a result of that review, and of our own research and analysis, we are compelled to agree with Treasury's legal conclusion that Treasury does not have legal authority to index capital gains for inflation by means of regulation.[1]
Section 1001(a) of the Internal Revenue Code ("Code") provides that "[t]he gain from the sale or other disposition of property shall be the excess [ 137] of the amount realized therefrom over the adjusted basis provided in section 1011." The general rule of section 1011(a) is that a property's adjusted basis is its "basis (determined under section 1012 . . .), adjusted as provided in section 1016." Section 1012 defines the basis of property as generally "the cost of such property." Although the term "cost" is not further defined in the Code, since the inception of the federal income tax system following ratification of the Sixteenth Amendment in 1913, Treasury has consistently interpreted the statutory term "cost" to mean price paid. Compare, e.g., T.D. 2090, 16 Treas. Dec. Int. Rev. 259, 273 (1914) (), with 26 C.F.R. § 1.1012-l(a) (1992) (). The current regulation dates from 1957. See T.D. 6265, 1957-2, 12 C.B. 463, 470.
The sole issue presented by your request is whether Treasury may, by amending its regulations, reinterpret the statutory term "cost" to mean the price paid as adjusted for inflation. The NCF Memorandum argues that Treasury may do so. In making that argument, the Memorandum relies heavily on analysis of the Supreme Court's decision in Chevron U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984).[2] Chevron announced a two-step rule for courts to follow when reviewing an agency's construction of a statute that it administers. The court must always first examine Id. at 842-43. If, however, "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. at 843. As the Court noted in Chevron, '"[t]he power of an administrative agency to administer a congressionally created . . . program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.'" Id. (quoting Morton v. Ruiz, 415 U.S. 199, 231 (1974)). But any such "gap" must be created by Congress: "assertions of ambiguity do not transform a clear statute into an ambiguous provision." United States v. James, 478 U.S. 597, 605 (1986).[3] [ 138]
The NCF Memorandum's central argument rests on the proposition that "cost" is an ambiguous term. In essence, the Memorandum argues that Congress, in using that word, left a "gap" in the statutory scheme to be filled by Treasury in the exercise of its rulemaking power under the Code. Specifically, the NCF Memorandum asserts that the "meaning of 'cost' is sufficiently ambiguous to permit the exercise of administrative discretion" to interpret cost in a manner that takes account of inflation, id. at 23, and consequently that in light of Chevron, "a regulation indexing capital gains for inflation should and would be upheld judicially as a valid exercise of the Treasury's interpretative discretion under the [Code], " id. at l.[4]
Chevron is a profound expression of principles that flow from the doctrine of separation of powers. The decision recognizes the appropriate roles of each of the three branches of government. Congress writes laws; the executive branch interprets and enforces them. Congress may, however, leave greater or lesser scope for Executive action. Thus, Congress often leaves to the executive branch the task of filling in the gaps in the statutory scheme through interpretation, and courts must then defer to the Executive's reasonable interpretations. As the Chevron Court explained: [ 139] While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices — resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the administration of the statute in light of everyday realities.
Chevron is thus a powerful analytical tool for the smooth administration of complex statutes and for the defense of agency actions under such statutes. It is not, however, unlimited. Chevron also teaches that when Congress writes legislation in specific terms, if it does not leave policy choices to be resolved by an administrative agency, then Congress's decision binds both the executive branch and the judiciary. To repeat: "If the intent of Congress is clear, that is the end of the matter." Id. at 842. In particular, Chevron does not furnish blanket authority for the regulatory rewriting of statutes whenever a dictionary gives more than a single definition for a statutory term or whenever some arguably relevant discipline assigns a specialized, technical meaning to such a term. Such a reading of Chevron would eviscerate the well-established rule of construction that statutes must be accorded their plain and commonly understood meaning.[5] Indeed, it would lead to a legal regime in which many statutory terms with widely understood meanings would be deemed "ambiguous." In this regard, we fully concur in your conclusion that "[i]f the plain meaning doctrine could be applied only to words that have only one conceivable meaning, it would have precious little utility as a principle to resolve conflicting interpretations of statutes." Treasury Memorandum at 7-8.[6] [ 140]
Chevron teaches that the inquiry into the meaning of a statutory term — including whether that meaning is ambiguous — is to be conducted by "employing traditional tools of statutory construction." 467 U.S. at 843 n.9. See also INS v. Cardoza-Fonseca, 480 U.S. at 449 (). These tools and canons include examination of "the plain language of the Act, its symmetry with [other relevant legal materials], and its legislative history." Id. Additionally, "[i]n ascertaining the plain meaning of the statute, the court must look to... the language and design of the statute as a whole." K Mart Corp., 486 U.S. at 291.
In reaching its ultimate conclusion that Treasury lacks the legal authority to index capital gains for inflation, your opinion considers and rejects the NCF Memorandum's arguments that the term "cost" is ambiguous. It concludes that "[t]he statute itself has a plain meaning which is clear and unambiguous: cost means the 'actual price paid' or 'purchase price.' " Treasury Memorandum at 1. See also, e.g., Id. at 4-8. As set forth below, we also conclude that "cost" is not ambiguous in the context of determining gain or loss from the disposition of property.
We must begin with what the Supreme Court has called a "fundamental canon of statutory construction" that "unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning." Perrin v. United States, AAA U.S. 37, 42 (1979). The fundamental canon, of course, applies with full force to the tax laws. See, e.g., Crane v. Commissioner, 331 U.S 1, 6 (1947) (); Old Colony Trust Co. v. Commissioner, 301 U.S. 379, 383 (1937) (); [ 141] Helvering v. San Joaquin Fruit & lnv. Co., 297 U.S. 496, 499 (1936) ().[7]Therefore, in order to determine whether "cost" is an ambiguous statutory term, we must first attempt to ascertain...
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