author: Justice Thomas Justice Breyer,

text:
    GITLITZ et al. v. COMMISSIONER OF INTERNAL REVENUE
    No. 99-1295.
    Argued October 2, 2000
    Decided January 9, 2001

      Thomas, J., delivered the opinion of the Court, in which Rehnquist, C. J., and Stevens, O’Connoe, Scalia, Kennedy, Souter, and Ginsburg, JJ., joined. Breyer, J., filed a dissenting opinion, post, p. 220.

      Darrell D. Hallett argued the cause for petitioners. With him on the briefs were John M. Colvin and Robert J. Chicoine.

      Kent L. Jones argued the cause for respondent. With him on the brief were Solicitor General Waxman, Acting Assistant Attorney General Junghans, Deputy Solicitor General Wallace, Teresa E. McLaughlin, and Edward T Perelmuter

        Richard M. Lipton and Theodore R. Bots filed a brief for the Real Estate Roundtable as amicus curiae urging reversal.

   Justice Thomas

delivered the opinion of the Court.

The Commissioner of Internal Revenue assessed tax deficiencies against petitioners David and Louise Gitlitz and Philip and Eleanor Winn because they used nontaxed discharge of indebtedness to increase their bases in S corporation stock and to deduct suspended losses. In this case we must answer two questions. First, we must decide whether the Internal Revenue Code (Code) permits taxpayers to increase bases in their S corporation stock by the amount of an S corporation’s discharge of indebtedness excluded from gross income. And, second, if the Code permits such an increase, we must decide whether the increase occurs before or after taxpayers are required to reduce the S corporation’s tax attributes.

I

David Gitlitz and Philip Winn were shareholders of P. D. W. & A., Inc., a corporation that had elected to be taxed under Subchapter S of the Code, 26 U. S. C. §§ 1361-1379 (1994 ed. and Supp. III). Subchapter S allows shareholders of qualified corporations to elect a “pass-through” taxation system under which income is subjected to only one level of taxation. See Bufferd v. Commissioner, 506 U. S. 523, 525 (1993). The corporation’s profits pass through directly to its shareholders on a pro rata basis and are reported on the shareholders’ individual tax returns. See § 1366(a)(1)(A). To prevent double taxation of income upon distribution from the corporation to the shareholders, § 1367(a)(1)(A).permits shareholders to increase their corporate bases by items of income identified in § 1366(a) (1994 ed. and Supp. III). Corporate losses and deductions are passed through in a similar manner, see § 1366(a)(1)(A), and the shareholders’ bases in the S corporation’s stock and debt are decreased accordingly, see §§ 1367(a)(2)(B), 1367(b)(2)(A). However, a shareholder cannot take corporate losses and deductions into account on his personal tax return to the extent that such items exceed his basis in the stock and debt of the S corporation. See § 1366(d)(1) (Supp. III). If those items exceed the basis, the excess is “suspended” until the shareholder’s basis becomes large enough to permit the deduction. See §§ 1366(d)(1), (2) (1994 ed. and Supp. III).

In 1991, P. D. W. & A. realized $2,021,296 of discharged indebtedness. At the time, the corporation was insolvent in the amount of $2,181,748. Because it was insolvent even after the discharge of indebtedness was added to its balance sheet, P. D. W. & A. excluded the entire discharge of indebtedness amount from gross income under 26 U. S. C. §§ 108(a) and 108(d)(7)(A). On their tax returns, Gitlitz and Winn increased their bases in P. D. W. & A. stock by their pro rata share (50 percent each) of the amount of the corporation’s discharge of indebtedness. Petitioners’ theory was that the discharge of indebtedness was an “item of income” subject to pass-through under § 1366(a)(1)(A). They used their increased bases to deduct on their personal tax returns corporate losses and deductions, including losses and deductions from previous years that had been suspended under § 1366(d). Gitlitz and Winn each had losses (including suspended losses and operating losses) that totaled $1,010,648. With the upward basis adjustments of $1,010,648 each, Gitlitz and Winn were each able to deduct the full amount of their pro rata share of P. D. W. & A.’s losses.

The Commissioner determined that petitioners could not use P. D. W. & A.’s discharge of indebtedness to increase their bases in the stock and denied petitioners’ loss deductions. Petitioners petitioned the Tax Court to review the deficiency determinations. The Tax Court, in its initial opinion, granted relief to petitioners and held that the discharge of indebtedness was an “item of income” and therefore could support a basis increase. See Winn v. Commissioner, 73 TCM 3167 (1997), ¶ 97,286 RIA Memo withdrawn and reissued, 75 TCM 1840 (1998), ¶ 98,071 RIA Memo TC. In light of the Tax Court’s decision in Nelson v. Commis sioner, 110 T. C. 114 (1998), aff’d, 182 E 3d 1152 (CA10 1999), however, the Tax Court granted the Commissioner’s motion for reconsideration and held that shareholders may not use an S corporation’s untaxed discharge of indebtedness to increase their bases in corporate stock. See Winn v. Commissioner, 75 TCM 1840 (1998), ¶ 98,071 RIA Memo TC.

The Court of Appeals affirmed. See 182 F. 3d 1143 (CA10 1999). It assumed that excluded discharge of indebtedness is an item of income subject to pass-through to shareholders pursuant to § 1366(a)(1)(A), id., at 1148, 1151, n. 7, but held that the discharge of indebtedness amount first had to be used to reduce certain tax attributes of the S corporation under § 108(b), and that only the leftover amount could be used to increase basis. The Court of Appeals explained that, because the tax attribute to be reduced (in this case the corporation’s net operating loss) was equal to the amount of discharged debt, the entire amount of discharged debt was absorbed by the reduction at the corporate level, and nothing remained of the discharge of indebtedness to be passed through to the shareholders under § 1366(a)(1)(A). Id., at 1151. Because Courts of Appeals have disagreed on how to treat discharge of indebtedness of an insolvent S corporation, compare Gaudiano v. Commissioner, 216 F. 3d 524, 535 (CA6 2000) (holding that tax attributes are reduced before excluded discharged debt income is passed through to shareholders), cert. pending, No. 00-459; Witzel v. Commissioner, 200 F. 3d 496, 498 (CA7 2000) (same), cert. pending, No. 99-1693; and 182 F. 3d, at 1150 (case below), with United States v. Farley, 202 F. 3d 198, 206 (CA3 2000) (holding that excluded discharged debt income is passed through to shareholders before tax attributes are reduced), cert. pending, No. 99-1675 [Reporter’s Note: See post, p. 1111]; see also Pugh v. Commissioner, 213 F. 3d 1324, 1330 (CA11 2000) (holding that excluded discharged debt income is subject to pass-through and can increase basis), cert. pending, No. 00-242, we granted certiorari. 529 U. S. 1097 (2000).

I

Before we can reach the issue addressed by the Court of Appeals — whether the increase in the taxpayers’ corporate bases occurs before or after the taxpayers are required to reduce the S corporation’s tax attributes — we must address the argument raised by the Commissioner. The Commissioner argues that the discharge of indebtedness of an insolvent S corporation is not an “item of income” and thus never passes through to shareholders. Under a plain reading of the statute, we reject this argument and conclude that excluded discharged debt is indeed an “item of income,” which passes through to the shareholders and increases their bases in the stock of the S corporation.

Section 61(a)(12) states that discharge of indebtedness generally is included in gross income. Section 108(a)(1) provides an express exception to this general rule:

“Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge ... of indebtedness of the taxpayer if—
“(B) the discharge occurs when the taxpayer is insolvent.”

The Commissioner contends that this exclusion from gross income alters the character of the discharge of indebtedness so that it is no longer an “item of income.” However, the text and structure of the statute do not support the Commissioner’s theory. Section 108(a) simply does not say that discharge of indebtedness ceases to be an item of income when the S corporation is insolvent. Instead it provides only that discharge of indebtedness ceases to be included in gross income. Not all items of income are included in gross income, see § 1366(a)(1) (providing that “items of income,” including “tax-exempt” income, are passed through to shareholders), so mere exclusion of an amount from gross income does not imply that the amount ceases to be an item of income. Moreover, §§ 101 through 136 employ the same construction to exclude various items from gross income: “Gross income does not include . . . .” The consequence of reading this language in the manner suggested by the Commissioner would be to exempt all items in these sections from pass-through under § 1366. However, not even the Commissioner encourages us to reach this sweeping conclusion. Instead the Commissioner asserts that discharge of indebtedness is unique among the types of items excluded from gross income because no economic outlay is required of the taxpayer receiving discharge of indebtedness. But the Commissioner is unable to identify language in the statute that makes this distinction relevant, and we certainly find none.

On the contrary, the statute makes clear that §108(a)’s exclusion does not alter the character of discharge of indebtedness as an item of income. Specifically, § 108(e)(1) reads:

“Except as otherwise provided in this section, there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness.”

This provision presumes that discharge of indebtedness is always “income,” and that the only question for purposes of § 108 is whether it is includible in gross income. If discharge of indebtedness of insolvent entities were not actually “income,” there would be no need to provide an exception to its inclusion in gross income; quite simply, if discharge of indebtedness of an insolvent entity were not “income,” it would necessarily not be included in gross income.

Notwithstanding the plain language of the statute, the Commissioner argues, generally, that excluded discharge of indebtedness is not income and, specifically, that it is not “tax-exempt income” under § 1366(a)(1)(A). First, the Commissioner argues that § 108 merely codified the “judicial insolvency exception,” and that, under this exception, discharge of indebtedness of an insolvent taxpayer was not considered income. The insolvency exception was a rule that the discharge of indebtedness of an insolvent taxpayer was not taxable income. See, e. g., Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 F. 2d 95 (CA5 1934); Astoria Marine Construction Co. v. Commissioner, 12 T. C. 798 (1949). But the exception has since been limited by § 108(e). Section 108(e) precludes us from relying on any understanding of the judicial insolvency exception that was not codified in § 108. And as explained above, the language and logic of §108 clearly establish that, although discharge of indebtedness of an insolvent taxpayer is not included in gross income, it is nevertheless income.

The Commissioner also relies on a Treasury Regulation to support his theory that no income is realized from the discharge of the debt of an insolvent:

“Proceedings under Bankruptcy Act.
“(1) Income is not realized by a taxpayer by virtue of the discharge, under section 14 of the Bankruptcy Act (11 U. S. C. 32), of his indebtedness as the result of an adjudication in bankruptcy, or by virtue of an agreement among his creditors not consummated under any provision of the Bankruptcy Act, if immediately thereafter the taxpayer’s liabilities exceed the value of his assets.” 26 CFR § 1.61-12(b) (2000).

Even if this regulation could be read (countertextually) to apply outside the bankruptcy context, it merely states that “[i]ncome is not realized.” The regulation says nothing about whether discharge of indebtedness is income subject to pass-through under § 1366.

Second, the Commissioner argues that excluded discharge of indebtedness is not “tax-exempt” income under § 1366(a)(1)(A), but rather “tax-deferred” income. According to the Commissioner, because the taxpayer is required to reduce tax attributes that could have provided future tax benefits, the taxpayer will pay taxes on future income that otherwise would have been absorbed by the forfeited tax attributes. Implicit in the Commissioner’s labeling of such income as “tax-deferred,” however, is the erroneous assumption that § 1366(a)(1)(A) does not include “tax-deferred” income. Section 1366 applies to “items of income.” This section expressly includes “tax-exempt” income, but this inclusion does not mean that the statute must therefore exclude “tax-deferred” income. The section is worded broadly enough to include any item of income, even tax-deferred income, that “could affect the liability for tax of any shareholder.” § 1366(a)(1)(A). Thus, none of the Commissioner’s contentions alters our conclusion that discharge of indebtedness of an insolvent S corporation is an item of income for purposes of § 1366(a)(1)(A).

III

Having concluded that excluded discharge of indebtedness is . an “item of income” and is therefore subject to pass-through to shareholders under § 1366, we must resolve the sequencing question addressed by the Court of Appeals— whether pass-through is performed before or after the reduction of the S corporation’s tax attributes under § 108(b). Section 108(b)(1) provides that “[t]he amount excluded from gross income under [§ 108(a)] shall be applied to reduce the tax attributes of the taxpayer as provided [in this section].” Section 108(b)(2) then lists the various tax attributes to be reduced in the order of reduction. The first tax attribute to be reduced, and the one at issue in this case, is the net operating loss. See § 108(b)(2)(A). Section 108(d)(7)(B) specifies that, for purposes of attribute reduction, the shareholders’ suspended losses for the taxable year of discharge are to be treated as the S corporation’s net operating loss. If tax attribute reduction is performed before the discharge of indebtedness is passed through to the shareholders (as the Court of Appeals held), the shareholders’ losses that exceed basis are treated as the corporation’s net operating loss and are then reduced by the amount of the discharged debt. In this case, no suspended losses would remain that would permit petitioners to take deductions. If, however, attribute reduction is performed after the discharged debt income is passed through (as petitioners argue), then the shareholders would be able to deduct their losses (up to the amount of the increase in basis caused by the discharged debt). Any suspended losses remaining then will be treated as the S corporation’s net operating loss and will be reduced by the amount of the discharged debt. Therefore, the sequence of the steps of pass-through and attribute reduction determines whether petitioners here were deficient when they increased their bases by the discharged debt amount and deducted their losses.

The sequencing question is expressly addressed in the statute. Section 108(b)(4)(A) directs that the attribute reductions “shall be made after the determination of the tax imposed by this chapter for the taxable year of the discharge.” (Emphases added.) See also § 1017(a) (applying the same sequencing when § 108 attribute reduction affects basis of corporate property). In order to determine the “tax imposed,” an S corporation shareholder must adjust his basis in his corporate stock and pass through all items of income and loss. See §§ 1866,1367 (1994 ed. and Supp. III). Consequently, the attribute reduction must be made after the basis adjustment and pass-through. In the case of petitioners, they must pass through the discharged debt, increase corporate bases, and then deduct their losses, all before any attribute reduction could occur. Because their basis increase is equal to their losses, petitioners have no suspended losses remaining. They, therefore, have no net operating losses to reduce.

Although the Commissioner has now abandoned the reasoning of the Court of Appeals below, we address the primary arguments made in the Courts of Appeals against petitioners’ reading of the sequencing provision. First, one court has expressed the concern that, if the discharge of indebtedness is passed through to the shareholder before the tax attributes are reduced, then there can never be any discharge of indebtedness remaining “at the corporate level,” § 108(d)(7)(A), by which to reduce tax attributes. Gaudino, 216 F. 3d, at 533. This concern presumes that tax attributes can be reduced only if the discharge of indebtedness itself remains at the corporate level. The statute, however, does not impose this restriction. Section 108(b)(1) requires only that the tax attributes be reduced by “[t]he amount excluded from gross income” (emphasis added), and that amount is not altered by the mere pass-through of the income to the shareholder.

Second, courts have discussed the policy concern that, if shareholders were permitted to pass through the discharge of indebtedness before reducing any tax attributes, the shareholders would wrongly experience a “double windfall”: They would be exempted from paying taxes on the full amount of the discharge of indebtedness, and they would be able to increase basis and deduct their previously suspended losses. See, e.g., 182 F. 3d, at 1147-1148. Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.

* * *

The judgment of the Court of Appeals, accordingly, is reversed.

It is so ordered.

Justice Breyer,

dissenting.

I agree with the majority’s reasoning with the exception of footnotes 6 and 10. The basic statutory provision before us is 26 U. S. C. § 108 — the provision that excludes from the “gross income” of any “insolvent” taxpayer, income that cancellation of a debt (COD) would otherwise generate. As the majority acknowledges, however, ante, at 214-215, n. 6, § 108 contains a subsection that sets forth a special exception. The exception, entitled “Special rules for S corporation,” says:

“(A) Certain provisions to be applied at corporate level.
“In the case of an S corporation, subsections (a), (b), (c), and (g) shall be applied at the corporate level.” 26 U.S.C. § 108(d)(7)(A).

If one reads this language literally as exclusive, both the COD exclusion (§ 108(a)) and the .tax attribute reduction (§ 108(b)) would apply only “at the corporate level.” Hence the COD income would not flow through to S corporation shareholders. Consequently, the insolvent S corporation’s COD income would not increase the shareholder’s basis and would not help the shareholder take otherwise unavailable deductions for suspended losses.

The Commissioner argues that we should read the language in this way as preventing the flow-through of the corporation’s COD income. Brief for Respondent 27. He points to the language of a House Committee, which apparently thought, when Congress passed an amendment to § 108, that the Commissioner’s reading is correct. H. R. Rep. No. 103-111, pp. 624-625 (1993) (“[T]he exclusion and basis reduction are both made at the S corporation level (sec. 108(d)(7)). The shareholders’ basis in their stock is not adjusted by the amount of debt discharge income that is excluded at the corporate level”). At least one commentator believes the same. See Loebl, Does the Excluded COD Income of an Insolvent S Corporation Increase the Basis of the Shareholders’ Stock?, 52 U. Fla. L. Rev. 957, 981-988 (2000). But see Lockhart & Duffy, Tax Court Rules in Nelson That S Corporation Excluded COD Income Does Not Increase Shareholder Stock Basis, 25 Wm. Mitchell L. Rev. 287 (1999).

The Commissioner finds support for his literal, exclusive reading of § 108(d)(7)(A)’s language in the fact that his reading would close a significant tax loophole. That loophole— preserved by the majority — would grant a solvent shareholder of an insolvent S corporation a tax benefit in the form of permission to take an otherwise unavailable deduction, thereby sheltering other, unrelated income from tax. See Witzel v. Commissioner, 200 F. 3d 496, 497 (CA7 2000) (Posner, C. J.) (“It is hard to understand the rationale for using a tax exemption to avoid taxation not only on the income covered by the exemption but also on unrelated income that is not tax exempt”). Moreover, the benefit often would increase in value as the amount of COD income increases, a result inconsistent with congressional intent to impose a “price” (attribute reduction), see Lipton, Different Courts Adopt Different Approaches to the Impact of COD Income on S Corporations, 92 J. Tax. 207 (2000), on excluded COD. Further, this deduction-related tax benefit would have very different tax consequences for identically situated taxpayers, depending only upon whether a single debt can be split into segments, each of which is canceled in a different year. For example, under the majority’s interpretation, a $1 million debt canceled in one year would permit Taxpayer A to deduct $1 million of suspended losses in that year, thereby permitting A to shelter $1 million of unrelated income in that year. But because §108 reduces tax attributes after the first year, five annual cancellations of $200,000 will not create a $1 million shelter. Timing is all important.

The majority acknowledges some of these policy concerns and confesses ignorance of any “other instance in which § 108 directly benefits a solvent entity,” but claims that its reading is mandated by the plain text of § 108(d)(7)(A) and therefore that the Court may disregard the policy consequences. Ante, at 220, n. 10. It is difficult, however, to see why we should interpret that language as treating different solvent shareholders differently, given that the words “at the corporate level” were added “[i]n order to treat all shareholders in the same manner.” H. R. Rep. No. 98-432, pt. 2, p. 1640 (1984). And it is more difficult to see why, given the fact that the “plain language” admits either interpretation, we should ignore the policy consequences. See Commissioner v. Gillette Motor Transport, Inc., 364 U. S. 130, 134-136 (1960) (abandoning literal meaning of 26 U. S. C. § 1221 (1958 ed.) for a reading more consistent with congressional intent). Accord, Commissioner v. P. G. Lake, Inc., 356 U. S. 260, 264-267 (1958); Corn Products Refining Co. v. Commissioner, 350 U. S. 46, 51-52 (1955); Hort v. Commissioner, 313 U. S. 28, 30-31 (1941).

The arguments from plain text on both sides here produce ambiguity, not certainty. And other things being equal, we should read ambiguous statutes as closing, not maintaining, tax loopholes. Such is an appropriate understanding of Congress’ likely intent. Here, other things are equal, for, as far as I am aware, the Commissioner’s literal interpretation of § 108(d)(7)(A) as exclusive would neither cause any tax-related harm nor create any statutory anomaly. Petitioners argue that it would create a linguistic inconsistency, for they point to a Treasury Regulation that says that the Commissioner will apply hobby loss limitations under § 183 “at the corporate level in determining” allowable deductions, while, presumably, nonetheless permitting the deduction so limited to. flow through to the shareholder. Treas. Reg. § 1.183 — 1(f), 26 CPR § 1.183 — 1(f) (2000). But we are concerned here with the “application” of an exclusion, not with “determining” the amount of a deduction. Regardless, the regulation’s use of the words “at the corporate level,” like the three other appearances of the formulation “applied” or “determined” “at the corporate level” in the Code, occur in contexts that are so very different from this one that nothing we say here need affect their interpretation. See 26 U. S. C. § 49(a)(1)(E)(ii)(I) (determining whether financing is recourse financing); 26 U. S. C. § 264(f)(5)(B) (1994 ed., Supp. III) (determining how to allocate interest expense to portions of insurance policies); 26 U. S. C. § 302(e)(1)(A) (determining whether a stock distribution shall be treated as a partial liquidation). If there are other arguments militating in favor of the majority’s interpretation, I have not found them.

The majority, in footnote 6, says that the words “at the corporate level" in § 108(d)(7)(A) apply to the exclusion of COD income from corporate income and to “tax attribute reduction,” but do not “suspen[d] the operation of . . . ordinary pass-through rules” because § 108(d)(7)(A) “does not state or imply that the debt discharge provisions shall apply only ‘at the corporate level.’” It is the majority, however, that should explain why it reads the provision as nonexclusive (where, as here, its interpretation of the Code results in the “practical equivalent of [a] double deduction,” Charles Ilfeld Co. v. Hernandez, 292 U. S. 62, 68 (1984)). See United States v. Shelly Oil Co., 394 U. S. 678, 684 (1969) (requiring “clear declaration of intent by Congress” in such circumstances). I do not contend that § 108(d)(7)(A) must be read as having exclusive effect, only that, given the alternative, this interpretation provides the best reading of § 108 as a whole. And I can find no “clear declaration of intent by Congress” to support the majority’s contrary conclusion regarding § 108(d)(7)(A)’s effect. It is that conclusion from which, for the reasons stated, I respectfully dissent.

       Each man filed a joint tax return with his wife.

       Section 1366(a)(1) provides:
      “In determining the tax under this chapter of a shareholder for the shareholder’s taxable year in which the taxable year of the S corporation ends . . . , there shall be taken into account the shareholder’s pro rata share of the corporation’s—
      “(A) items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder ....”

       In Nelson, the Tax Court held that excluded discharge of indebtedness does not pass through to an S corporation’s shareholders because § 108 is an exception to normal S corporation pass-through rules. Specifically, the court held that, because § 108(d)(7)(A) requires that “subsections (a) [and (b) of § 108] shall be applied at the corporate level” in the case of an S corporation, it precludes any pass-through of the discharge of indebtedness to the shareholder level. See Nelson, 110 T. C., at 121-124.

       Section 108(b)(1) reads: “The amount excluded from gross income under [§ 108(a)(1)] shall be applied to reduce the tax attributes of the taxpayer ....”

       The Commissioner has altered his arguments throughout the course of this litigation. According to the Tax Court, during the first iteration of this case the Commissioner made several arguments but then settled on a “final” one — that the discharge of indebtedness of the insolvent S corporation was not an “item of income,” see 73 TCM 3167 (1997), ¶ 97,286 RIA Memo TC. In the Court of Appeals, the Commissioner argued instead that, because any pass-through of excluded discharge of indebtedness to petitioners took place after any reduction of tax attributes and by then the income would have been fully absorbed by the tax attributes, no discharged debt remained to flowthrough to petitioners. The Commissioner relegated to a footnote his argument that discharge of indebtedness is not an “item of income.” See Brief for Appellee in Nos. 98-9009 and 98-9010 (CA10), p. 33, n. 14.

       The Commissioner also contends, as does the dissent, that because § 108(d)(7)(A) mandates that the discharged debt amount be determined and applied to reduce tax attributes “at the corporate level,” rather than at the shareholder level, the discharged debt, even if it is some type of income, simply cannot pass through to shareholders. In other words, the Commissioner contends' that § 108(d)(7)(A) excepts excluded discharged debt from the general pass-through provisions for S corporations. However, § 108(d)(7)(A) merely directs that the exclusion from gross income and the tax attribute reduction be made at the corporate level. Section 108(d)(7)(A) does not state or imply that the debt discharge provisions shall apply only “at the corporate level.” The very purpose of Subchap-ter S is to tax at the shareholder level, not the corporate level. Income is determined at the S corporation level, see § 1863(b), not in order to tax the corporation, see § 1363(a) (exempting an S corporation from income tax), but solely to pass through to the S corporation’s shareholders the corporation’s income. Thus, the controlling provision states that, in determining a shareholder’s liability, “there shall be taken into account the shareholder’s pro rata share of the corporation’s . . . items of income (including tax-exempt income)_” § 1366(a)(1). Nothing in § 108(d)(7)(A) suspends the operation of these ordinary pass-through rules.

       Under this scenario, the shareholders’ losses would be reduced by the discharge of indebtedness. However, it is unclear precisely what would happen to the discharge of indebtedness. The Court of Appeals below stated that the discharged debt would be “absorbed” by the reduction to the extent of the net operating loss and that therefore only the excess excluded discharged debt would remain to pass through to the shareholders. 182 F. 3d 1143, 1149 (CA10 1999). In contrast, another Court of Appeals suggested, albeit in dictum, that the full amount of the discharge might still pass through to the shareholder and be used to increase basis; the discharged debt amount would reduce the net operating loss but would not be absorbed by it. Witzel v. Commissioner, 200 F. 3d 496, 498 (CA7 2000). We need not resolve this issue because we conclude that the discharge of indebtedness passes through before any attribute reduction takes place.

       The Commissioner has abandoned his argument related to the sequencing issue before this Court. This abandonment is particularly odd given that the sequencing issue predominated in the Commissioner’s argument to the Court of Appeals. Notwithstanding the Commissioner’s attempt at oral argument to distance himself from the reasoning of the Court of Appeals on this issue — the Commissioner represented to us that the Court of Appeals developed its reading of the statute sua sponte, Tr. of Oral Arg. 22-24, 27 — it is apparent from the Commissioner’s brief in the Court of Appeals that the Commissioner supplied the very sequencing theory that the Court of Appeals adopted. Compare, e. g., Brief for Appellee in Nos. 98-9009 and 98-9010 (CA10), p. 28 (“First, the discharge of indebtedness income that is excluded under Section 108(a) at the corporate level is temporarily set aside and has no tax consequences .... Second, PDW & A computes its tax attributes, i. e., taxpayers’ suspended losses. Third, the excluded discharge of indebtness income is applied against and eliminates the suspended losses. Because the excluded income is applied against — and offset by — the suspended losses, no item of income flows through to taxpayers under Section 1366(a), and no upward basis adjustment is made under Section 1367(a)” (citations omitted)), with, e. g., 182 F. 3d, at 1151 (“PDW & A first must compute its discharge of indebtedness income and set this figure aside temporarily. The corporation then must calculate its net operating loss tax attribute.... Finally, the corporation must apply the excluded discharged debt to reduce its tax attributes. In this case, the net operating loss tax attribute fully absorbs the corporation’s excluded- discharge of indebtedness income. Thus, there are no items of income to pass through to Gitlitz and Winn”).

       Similar to this argument is the contention that, in cases such as this one in which the shareholders’ suspended losses are fully deducted before attribute reduction could take place, no net operating loss remains and no attribute reduction can occur, thus rendering § 108(b) inoperative. However, there will be other cases in which § 108(b) will be inoperative. In particular, if a taxpayer has no tax attributes at all, there will be no reduction. Certainly the statute does not condition the exclusion under § 108(a) on the ability of the taxpayer to reduce attributes under § 108(b). Likewise, in the case of shareholders similarly situated to petitioners in this case, there is also the possibility that other attributes, see §§ 108(b)(2)(B)-(G), could be reduced.

       The benefit at issue in this ease arises in part because § 108(d)(7)(A) permits the exclusion of discharge of indebtedness income from gross income for an insolvent S corporation even when the S corporation shareholder is personally solvent. We are aware of no other instance in which § 108 directly benefits a solvent entity. However, the result is required by statute. Between 1982 and 1984, §108 provided that the exclusion from gross income and the reduction in tax attributes occurred at the shareholder level. See Subchapter S Revision Act of 1982, Pub. L. 97-354, § 3(e), 96 Stat. 1689. This provision, which paralleled the current taxation of partnerships at the partner level, see 26 U. S. C. § 108(d)(6), prevented solvent shareholders from benefiting as a result of their S corporation’s insolvency. In 1984, however, Congress amended the Code to provide that §108 be applied “at the corporate level.” Tax Reform Act of 1984, Pub. L. 98-369, § 721(b), 98 Stat. 966. It is as a direct result of this amendment that the solvent petitioners in this case are able to benefit from § 108’s exclusion.


source: Caselaw Access Project

author: Per Curiam.

license: Public Domain

text:
    FIORE v. WHITE, WARDEN, et al.
    No. 98-942.
    Argued October 12, 1999 — Question certified November 30, 1999
    Decided January 9, 2001
    After the Pennsylvania Supreme Court’s response to the certified question, supplemental briefs were filed by James Brandon Lieber and Harold Gondelman, for petitioner, and by D. Michael Fisher, Attorney General of Pennsylvania, Robert A. Grad, Assistant Executive Deputy Attorney General, and Andrea F. McKenna, Senior Deputy Attorney General, for respondents.
   Per Curiam.

Petitioner, William Fiore, was convicted of violating a Pennsylvania statute prohibiting the operation of a hazardous waste facility without a permit. After Fiore’s conviction became final, the Pennsylvania Supreme Court interpreted the statute for the first time, and made clear that Fiore’s conduct was not within its scope. However, the Pennsylvania courts refused to grant Fiore collateral relief. We granted certiorari in part to decide when, or whether, the Federal Due Process Clause requires a State to apply a new interpretation of a state criminal statute retroactively to cases on collateral review.

In order to determine if that question was in fact presented, we asked the Pennsylvania Supreme Court whether its decision interpreting the statute not to apply to conduct like Fiore’s was a new interpretation, or whether it was, instead, a correct statement of the law when Fiore’s conviction became final. The Pennsylvania Supreme Court, responding to our certified question, has now made clear that retro-activity is not at issue. At the same time, that court’s interpretation of its statute makes clear that Fiore did not violate the statute. We consequently find that his conviction is not consistent with the demands of the Federal Due Process Clause. See Jackson v. Virginia, 443 U. S. 307, 316 (1979).

H-1

This case, previously described in greater detail in our opinion certifying the state-law question to the Pennsylvania Supreme Court, 528 U. S. 23 (1999), arises out of William Fiore’s conviction under a Pennsylvania statute that prohibits “operating] a hazardous waste” facility without a “permit.” Pa. Stat. Ann., Tit. 35, § 6018.401(a) (Purdon 1993); see Commonwealth v. Fiore, CC No. 8508740 (Ct. Common Pleas, Allegheny Cty., Pa., Jan. 19, 1988), App. 6. The Commonwealth conceded that Fiore in fact had a permit, but argued that Fiore had deviated so dramatically from the permit’s terms that he nonetheless had violated the statute. And the Commonwealth’s lower courts agreed. See id., at 43-44; Commonwealth v. Fiore, 391 Pa. Super. 634, 563 A. 2d 189 (1989) (affirming Fiore’s conviction on the trial court’s reasoning).

The Pennsylvania Supreme Court declined to review Fiore’s case, Commonwealth v. Fiore, 525 Pa. 577, 575 A. 2d 109 (1990), and his conviction became final. Thereafter, the Pennsylvania Supreme Court agreed to review the conviction of Fiore’s co-defendant, David Scarpone, convicted of the same crime at the same time. The Supreme Court reversed Scarpone’s conviction on the ground that the statute meant what it said: The statute made it unlawful to operate a facility without a permit; one who deviated from his permit’s terms was not a person without a permit; hence, a person who deviated from his permit’s terms did not violate the statute. Commonwealth v. Scarpone, 535 Pa. 273, 279, 634 A. 2d 1109, 1112 (1993) (describing the Commonwealth’s interpretation as “a bald fiction we cannot endorse”).

Fiore, unsuccessful in his subsequent state-court attempts to have his own conviction set aside, see Commonwealth v. Fiore, 445 Pa. Super. 401, 665 A. 2d 1185 (1995), appeal denied, Commonwealth v. Fiore, 544 Pa. 623, 675 A. 2d 1243 (1996), brought a federal habeas corpus action. The District Court granted the writ, but the Court of Appeals for the Third Circuit reversed. 149 F. 3d 221 (1998). The Court of Appeals believed that the Pennsylvania Supreme Court, in Scarpone’s case, had announced a new rule of law, inapplicable to Fiore’s already final conviction. Id., at 227. And, the Court of Appeals said, “state courts are under no [federal] constitutional obligation to apply their decisions retroactively.” Id., at 222. We granted certiorari to determine whether Fiore’s conviction was inconsistent with the Due Process Clause. 526 U. S. 1038 (1999).

II

Because we were uncertain whether the Pennsylvania Supreme Court’s decision change in the law of Pennsylvania, we certified the following question to that court:

“Does the interpretation of Pa. Stat. Ann., Tit. 35, § 6018.401(a) (Purdon 1993), set forth in Commonwealth v. Scarpone, 535 Pa. 273, 279, 634 A. 2d 1109, 1112 (1993), state the correct interpretation of the law of Pennsylvania at the date Fiore’s conviction became final?” 528 U. S., at 29.

We received the following reply:

“Scarpone did not announce a new rule of law. Our ruling merely clarified the plain language of the statute.... Our interpretation of [§ 6018.401(a)] in Scarpone furnishes the proper statement of law at the date Fiore’s conviction became final.” Fiore v. White, 562 Pa. 634, 646, 757 A. 2d 842, 848-849 (2000) (citation omitted).

The Pennsylvania Supreme Court’s reply specifies that the interpretation of § 6018.401(a) set out in Scarpone “merely clarified” the statute and was the law of Pennsylvania — as properly interpreted — at the time of Fiore’s conviction. Because Scarpone was not new law, this ease presents no issue of retroactivity. Rather, the question is simply whether Pennsylvania can, consistently with the Federal Due Process Clause, convict Fiore for conduct that its criminal statute, as properly interpreted, does not prohibit.

This Court’s precedents make clear that Fiore’s conviction and continued incarceration on this charge violate due process. We have held that the Due Process Clause of the Fourteenth Amendment forbids a State to convict a person of a crime without proving the elements of that crime beyond a reasonable doubt. See Jackson, 443 U. S., at 316; In re Winship, 397 U. S. 358, 364 (1970). In this case, failure to possess a permit is a basic element of the crime of which Fiore was convicted. Scarpone, supra, at 279, 634 A. 2d, at 1112. And the parties agree that the Commonwealth presented no evidence whatsoever to prove that basic element. To the contrary, the Commonwealth, conceding that Fiore did possess a permit, see Brief for Respondents 1, necessarily concedes that it did not prove he failed to possess one.

The simple, inevitable conclusion is that Fiore’s conviction fails to satisfy the Federal Constitution’s demands. We therefore reverse the contrary judgment of the Third Circuit and remand this case for proceedings consistent with this opinion.

So ordered.


author: Justice Ginsburg Justice Stevens,

text:
    LOPEZ v. DAVIS, WARDEN, et al.
    No. 99-7504.
    Argued October 30, 2000
    Decided January 10, 2001

      Ginsburg, J., delivered the opinion of the Court, in which O’Connor, Scalia, Souter, Thomas, and Breyer, JJ., joined. Stevens, J., filed a dissenting opinion, in which Rehnquist, C. J., and Kennedy, J., joined, post, p. 245.

      Mark V. Meierhenry argued the cause and filed briefs for petitioner.

      Beth S. Brinkmann argued the cause for respondents. With her on the brief were Solicitor General Waxman, Assistant Attorney General Robinson, and Deputy Solicitor General Dreeben.

        Stephen R. Sady filed a brief for the National Association of Criminal Defense Lawyers et al. as amici curiae urging reversal.

   Justice Ginsburg

delivered the opinion of the Court.

Congress has provided, in 18 U. S. C. § 3621(e)(2)(B), that the Bureau of Prisons (Bureau or BOP) may reduce by up to one year the prison term of an inmate convicted of a nonviolent felony, if the prisoner successfully completes a substance abuse program. The Bureau’s implementing regulation categorically denies early release to prisoners whose current offense is a felony attended by “the carrying, possession, or use of a firearm.” 28 CFR § 550.58(a)(1)(vi)(B) (2000). The validity of the Bureau’s regulation is the question presented in this case. We hold, in accord with the Court of Appeals for the Eighth Circuit, that the regulation is a permissible exercise of the Bureau’s discretion under 18 U.S. C. § 3621(e)(2)(B).

I

A

Title 18 U. S. C. § 3621 governs the imprisonment of persons convicted of federal crimes. In 1990, Congress amended the statute to provide that “[t]he Bureau shall. .. make available appropriate substance abuse treatment for each prisoner the Bureau determines has a treatable condition of substance addiction or abuse.” Pub. L. 101-647, §2903, 104 Stat. 4913. Four years later, Congress again amended § 3621, this time to provide incentives for prisoner participation in BOP drug treatment programs. The incentive provision at issue reads: “The period a prisoner convicted of a nonviolent offense remains in custody after successfully completing a treatment program may be reduced by the Bureau of Prisons, but such reduction may not be more than one year from the term the prisoner must otherwise serve.” Pub. L. 103-322, §32001, 108 Stat. 1897 (codified at 18 U. S. C. § 3621(e)(2)(B)).

In 1995, the Bureau published a rule to implement the early release incentive. 60 Fed. Reg. 27692-27695; 28 CFR § 550.58. Because the statute explicitly confined the incentive to prisoners convicted of “nonviolent offensefs],” 18 U. S. C. § 3621(e)(2)(B), the BOP ranked ineligible for early release all inmates currently incarcerated for “crime[s] of violence,” 60 Fed. Reg. 27692. As explained in the Bureau’s program statement, the BOP defined “crimes of violence” to include a drug trafficking conviction under 21 U. S. C. § 841, if the offender received a two-level sentence enhancement under United States Sentencing Commission, Guidelines Manual (USSG) §2D1.1(b)(1) (Nov. 2000), for possessing a dangerous weapon during commission of the drug offense. Bureau of Prisons Program Statement No. 5162.02, § 9 (July 24, 1995), reprinted in App. to Brief for Petitioner 17-18. “[E]xercising [its] discretion in reducing a sentence,” the Bureau also excluded from early release eligibility inmates who had a prior conviction “for homicide, forcible rape, robbery, or aggravated assault.” 60 Fed. Reg. 27692 (codified at 28 CFR §550.58 (1995)).

The Courts of Appeals divided over the validity of the Bureau’s definition of crimes of violence to include drug offenses that involved possession of a firearm. A majority of Circuits, including the Eighth, held that § 3621(e)(2)(B) required the Bureau to look only to the offense of conviction (drug trafficking), and not to sentencing factors (firearm possession), in determining whether an offender was convicted of a “nonviolent offense,” and was therefore eligible under the statute for the early release incentive. Martin v. Gerlinski, 133 F. 3d 1076, 1079 (CA8 1998); see also Fristoe v. Thompson, 144 F. 3d 627, 631 (CA10 1998); Byrd v. Hasty, 142 F. 3d 1395, 1398 (CA11 1998); Roussos v. Menifee, 122 F. 3d 159, 164 (CA3 1997); Downey v. Crabtree, 100 F. 3d 662, 668 (CA9 1996). The Fourth and Fifth Circuits, however, upheld the Bureau’s classification of drug offenses attended by firearm possession as violent crimes. Pelissero v. Thompson, 170 F. 3d 442, 447 (CA4 1999); Venegas v. Henman, 126 F. 3d 760, 763 (CA5 1997).

This split among the Circuits prompted the Bureau in 1997 to publish the regulation now before the Court. See 62 Fed. Reg. 53690-53691. Like the 1995 rule, the current regulation excludes from early release eligibility offenders who possessed a firearm in connection with their offenses. In contrast to the earlier rule, however, the 1997 regulation does not order this exclusion by defining the statutory term “prisoner convicted of a nonviolent offense” or the cognate term “crimes of violence.” Instead, the current regulation relies upon “the discretion allotted to the Director of the Bureau of Prisons in granting a sentence reduction to exclude [enumerated categories of] inmates.” Id., at 53690. The regulation, designed to achieve consistent administration of the incentive, now provides:

“(a) Additional early release criteria. (1) As an exercise of the discretion vested in the Director of the Federal Bureau of Prisons, the following categories of inmates are not eligible for early release:
“(iv) Inmates who have a prior felony or misdemeanor conviction for homicide, forcible rape, robbery, or aggravated assault, or child sexual abuse offenses;
“(vi) Inmates whose current offense is a felony:
“(B) That involved the carrying, possession, or use of a firearm or other dangerous weapon . . . .” 28 CFR § 550.58(a) (2000).

In sum, the 1995 rule defined the statutory term “prisoner convicted of a nonviolent offense” to exclude categorically an inmate who possessed a firearm in connection with his offense. The current regulation categorically excludes such an inmate, not because § 3621(e)(2)(B) so mandates, but pursuant to the Bureau’s asserted discretion to prescribe additional early release criteria. Drug traffickers who possess firearms when they engage in crimes are no longer characterized as “violent” offenders within the meaning of the statute. But they are bracketed, for sentence reduction purposes, with persons currently incarcerated for “nonviolent offense[sj” who in the past committed crimes qualifying as violent. The preconviction conduct of both armed offenders and certain redicivists, in the Bureau’s view, “suggests] that they pose a particular risk to the public.” Brief for Respondents 30.

B

In 1997, petitioner Christopher A. Lopez was convicted of possession with intent to distribute methamphetamine, in violation of 21 U. S. C. §841. Upon finding that Lopez possessed a firearm in connection with his offense, the District Court enhanced his sentence by two levels pursuant to USSG §2D1.1(b)(1). Lopez is currently scheduled to be released from prison in June 2002.

While incarcerated, Lopez requested substance abuse treatment. The Bureau found him qualified for its residential drug abuse program, but categorically ineligible, under 28 CFR § 550.58(a)(1)(vi), for early release. App. 3-7.

When notified that he would not be a candidate for early release, Lopez challenged the BOP’s determination by filing a petition for a writ of habeas corpus, under 28 U. S. C. §2241, in the United States District Court for the District of South Dakota. The District Court granted the petition. In that court’s view, the Bureau’s 1997 regulation did not correct the infirmity the Eighth Circuit saw in the 1995 rule. See App. 17-18, and n. 4 (citing Martin, 133 F. 3d, at 1079). “[I]t is true,” the District Court recognized, “that the BOP may exercise a great deal of discretion in determining who among the eligible nonviolent offenders may be released.” App. 17. But, the District Court held, the BOP may not categorically count out, “based upon sentencing factors or weapon possession,” inmates whose underlying conviction was for a nonviolent crime. Id., at 18. Accordingly, the District Court ordered the BOP “to reconsider Lopez’s eligibility for early release.” Id., at 19.

The Eighth Circuit reversed. Bellis v. Davis, 186 F. 3d 1092 (1999). Section 3621(e)(2)(B), the Court of Appeals observed, “states only that the prison term of an inmate convicted of a nonviolent offense ‘may be reduced by the Bureau of Prisons.’ ” Id., at 1094 (quoting 18 U. S. C. § 3621(e)(2)(B)). This discretionary formulation, the Eighth Circuit reasoned, allows the Bureau to devise a regime based on criteria that can be uniformly applied. The statute grants no entitlement to any inmate or class of inmates, the Court of Appeals noted, and it does not instruct the Bureau to make “individual, rather than categorical, assessments of eligibility for inmates convicted of nonviolent offenses.” 186 F. 3d, at 1094. The court further reasoned that, to the extent Congress left a gap in § 3621(e)(2)(B) for the Bureau to fill, deference is owed the BOP’s interpretation under Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 843-846, 866 (1984), so long as the interpretation is a permissible construction of the statute. 186 F. 3d, at 1095. The Bureau had elected to deny early release to certain categories of prisoners, notably recidivists and firearms carriers, whose “conduct indicates that they pose a serious risk to public safety.” Ibid. That decision, the Court of Appeals concluded, “represents a manifestly permissible construction of the statute and an appropriate exercise of the BOP’s discretion.” Ibid.

The Eighth Circuit next explained why its earlier decision in Martin did not control this case, which trains on the BOP’s 1997 regulation: Martin addressed only the Bureau’s 1995 attempt to interpret the statutory term “nonviolent offense”; the court in that ease did not address “whether the BOP may, as an exercise of its discretion, . . . look to sentencing factors in deciding which individuals among statutorily eligible inmates are appropriate candidates for early release.” 186 F. 3d, at 1095. Facing that issue, the Court of Appeals held such an exercise of discretion proper. Ibid.

The Courts of Appeals have again divided, now over the permissibility of the Bureau’s current (1997) regulation. The Tenth and Eleventh Circuits, in line with their prior decisions invalidating the 1995 rule, have concluded that § 3621(e)(2)(B) permits no categorical exclusions of nonviolent offenders based on sentence enhancements. Ward v. Booker, 202 F. 3d 1249, 1256-1257 (CA10 2000); Kilpatrick v. Houston, 197 F. 3d 1134, 1135 (CA11 1999). The Ninth Circuit, on the other hand, has agreed with the Eighth Circuit that precedent invalidating the 1995 rule does not control and that, in 1997, the BOP permissibly exercised its discretion under § 3621(e)(2)(B) when it categorically excluded from early release consideration inmates who possessed a firearm in connection with their nonviolent offenses. Bowen v. Hood, 202 F. 3d 1211, 1218-1220 (2000).

We granted certiorari to resolve this conflict, 529 U. S. 1086 (2000), and now affirm the judgment of the Eighth Circuit.

II

The statute provides: “The period a prisoner convicted of a nonviolent offense remains in custody after successfully completing a treatment program may be reduced by the Bureau of Prisons_” 18 U.S.C. § 3621(e)(2)(B). The measure thus categorically denies early release eligibility to inmates convicted of violent offenses. The question we address is whether the Bureau has discretion to delineate, as an additional category of ineligible inmates, those whose current offense is a felony involving a firearm. 28 CFR § 550.58(a)(1)(vi)(B) (2000).

Lopez urges that the statute is unambiguous. He says that, by identifying a class of inmates ineligible for sentence reductions under § 3621(e)(2)(B), i. e., those convicted of a violent offense, Congress has barred the Bureau from identifying further categories of ineligible inmates. “If Congress wanted the BOP to reduce the categories of inmates eligible for the early release incentive (beyond the one identified by Congress), Congress would have specifically placed this grant of authority in the language of the statute.” Brief for Petitioner 23. As to the statutory instruction that the Bureau “may” reduce sentences, Lopez initially suggests it is merely a grant of authority to the BOP to reduce a sentence that, prior to the enactment of § 3621(e)(2)(B), could not be reduced for successful completion of drug treatment: “The power granted was to give reductions not the power to decide who was eligible to receive reductions.” Id., at 21. He alternately contends that the Bureau may take into account only “post-conviction conduct,” not “pre-conviction conduct.” Reply Brief 4-5. Acting on a case-by-case basis, Lopez asserts, the Bureau may “deny early release to those inmates [who] are statutorily eligible, but who do not deserve early release based on their conduct while in prison.” Id., at 5. Under this reading, the Bureau may exercise discretion in denying early release, but only on an individual basis, taking account solely of postconviction conduct.

In the Bureau’s view, § 3621(e)(2)(B) establishes two prerequisites for sentence reduction: conviction of a nonviolent offense and successful completion of drug treatment. Brief for Respondents 18. If those prerequisites are met, the Bureau “may,” but also may not, grant early release. The BOP opposes Lopez’s argument that Congress barred the Bureau from imposing limitations categorically or on the basis of preconviction conduct. According to the Bureau, Congress simply “did not address how the Bureau should exercise its discretion within the class of inmates who satisfy the statutory prerequisites for early release.” Id., at 23. Because Congress left the question unaddressed, the Bureau maintains, the agency may exclude inmates either categorically or on a case-by-case basis, subject of course to its obligation to interpret the statute reasonably, see Chevron, 467 U. S., at 844, in a manner that is not arbitrary or capricious, see 5 U, S. C. § 706(2)(A). In this instance, the Bureau urges, it has acted reasonably: Its denial of early release to all inmates who possessed a firearm in connection with their current offense rationally reflects the view that such inmates displayed a readiness to endanger another’s life; accordingly, in the interest of public safety, they should not be released months in advance of completing their sentences.

We agree with the Bureau’s position. Preliminarily, we note conspicuous anomalies in Lopez’s construction. If § 3621(e)(2)(B) functions not as a grant of discretion to determine early release eligibility, but both as an authorization and a command to reduce sentences, then Congress’ use of the word “may,” rather than “shall,” has no significance. And if the BOP does have discretion to deny early release to certain inmates, but only based on individualized assessments of postconviction conduct, then the agency cannot categorically deny early release even to recidivists with prior (perhaps multiple) convictions for “homicide, forcible rape ... , or child sexual abuse offenses.” 28 CFR § 550.58(a)(l)(iv) (2000). For that provision, as much as the exclusion of inmates imprisoned for offenses involving a firearm, see supra, at 235, entails no individualized determination based on postconviction conduct. Furthermore, Lopez’s position would confine the BOP’s discretion under § 3621(e)(2)(B) to consideration of factors of the kind the Bureau already may consider in granting credit for “satisfactory behavior.” See 18 U. S. C. § 3624(b)(1) (“a prisoner [serving a term of more than one year and less than life] may receive credit toward the service of the prisoner’s sentence ... subject to determination by the Bureau of Prisons that, during that year, the prisoner has displayed exemplary compliance with such institutional disciplinary regulations”).

We turn now to the Bureau’s reading of the statutory text, which instructs that the agency “may” reduce the sentence of a nonviolent offender who has successfully completed a drug treatment program. Congress’ use of the permissive “may” in § 3621(e)(2)(B) contrasts with the legislators’ use of a mandatory “shall” in the very same section. Elsewhere in § 3621, Congress used “shall” to impose discretionless obligations, including the obligation to provide drug treatment when funds are available. See 18 U. S. C. § 3621(e)(1) (“Bureau of Prisons shall, subject to the availability of appropriations, provide residential substance abuse treatment (and make arrangements for appropriate aftercare)”); see also, e. g., § 3621(b) (“The Bureau shall designate the place of the prisoner’s imprisonment.... In designating the place of imprisonment or making transfers under this subsection, there shall be no favoritism given to prisoners of high social or economic status.”). Sensibly read, the grant of discretion in § 3621(e)(2)(B) to decide whether to reduce a sentence parallels the grant of discretion in § 3621(e)(2)(A) to retain a prisoner who successfully completes drug treatment “under such [custodial] conditions as the Bureau deems appropriate.” § 3621(e)(2)(A). When an eligible prisoner successfully completes drug treatment, the Bureau thus has the authority, but not the duty, both to alter the prisoner’s conditions of confinement and to reduce his term of imprisonment.

The constraints Lopez urges — requiring the BOP to make individualized determinations based only on postconviction conduct — are nowhere to be found in § 3621(e)(2)(B). Beyond instructing that the Bureau has discretion to reduce the period of imprisonment for a nonviolent offender who successfully completes drug treatment, Congress has not identified any further circumstance in which the Bureau either must grant the reduction, or is forbidden to do so. In this familiar situation, where Congress has enacted a law that does not answer “the precise question at issue,” all we must decide is whether the Bureau, the agency empowered to administer the early release program, has filled the statutory gap “in a way that is reasonable in light of the legislature’s revealed design.” NationsBank of N C., N. A. v. Variable Annuity Life Ins. Co., 513 U. S. 251, 257 (1995) (citing Chevron, 467 U. S., at 842); see also Reno v. Koray, 515 U. S. 50, 61 (1995) (deferring to BOP’s interpretation of statute). We think the agency’s interpretation is reasonable both in taking account of preconviction conduct and in making categorical exclusions.

First, as the dissent but not Lopez recognizes, see post, at 248, the Bureau need not blind itself to preconviction conduct that the agency reasonably views as jeopardizing life and limb. By denying eligibility to violent offenders, the statute manifests congressional concern for preconviction behavior — and for the very, conduct leading to conviction. The Bureau may reasonably attend to these factors as well. Its regulation in this regard is kin to the Attorney General’s order upheld in INS v. Yueh-Shaio Yang, 519 U. S. 26 (1996). That case involved a statute authorizing the Attorney General to waive deportation of aliens deportable for entry fraud. The Attorney General had refused to waive deportation for one alien because of “acts of fraud ... in connection with his entry.” Id., at 27. The alien argued that because the statute made aliens who had committed entry fraud eligible for waiver, the Attorney General was precluded from taking such conduct into account “at all” in deciding whether to grant relief. Id., at 30. We rejected this view, stating that the statute “establishes only the alien’s eligibility for the waiver. Such eligibility in no way limits the considerations that may guide the Attorney General in exercising her discretion to determine who, among those eligible, will be accorded grace.” Id., at 31. Similarly in this case, the statute’s restriction of early release eligibility to nonviolent offenders does not cut short the considerations that may guide the Bureau. Just as the Attorney General permissibly considered aspects of entry fraud, even though entry fraud was a criterion of statutory eligibility, so the Bureau may consider aspects of the conduct of conviction, even though the conviction is a criterion of statutory eligibility.

We also reject Lopez’s argument, echoed in part by the dissent, post, at 248-249, that the agency must not make categorical exclusions, but may rely only on case-by-case assessments. “[E]ven if a statutory scheme requires individualized determinations,” which this scheme does not, “the decisionmaker has the authority to rely on rulemaking to resolve certain issues of general applicability unless Congress clearly expresses an intent to withhold that authority.” American Hospital Assn. v. NLRB, 499 U. S. 606, 612 (1991); accord, Heckler v. Campbell, 461 U. S. 458, 467 (1983). The approach pressed by Lopez — case-by-case decisionmaking in thousands of cases each year, see supra, at 243, n. 4 — could invite favoritism, disunity, and inconsistency. The Bureau is not required continually to revisit “issues that may be established fairly and efficiently in a single rulemaking proceeding.” Heckler, 461 U. S., at 467.

Having decided that the Bureau may categorically exclude prisoners based on their preconviction conduct, we further hold that the regulation excluding Lopez is permissible. The Bureau reasonably concluded that an inmate’s prior involvement with firearms, in connection with the commission of a felony, suggests his readiness to resort to life-endangering violence and therefore appropriately determines the early release decision.

For the reasons stated, the judgment of the Court of Appeals for the Eighth Circuit is

Affirmed.

Justice Stevens,

with whom The Chief Justice and Kennedy join, dissenting.

The question at issue in this case is whether all, or merely some, of the federal prisoners who were convicted of nonviolent offenses and who have successfully completed a Bureau of Prisons (BOP or Bureau) drug treatment program are eligible for a sentence reduction pursuant to 18 U. S. C. § 3621(e)(2)(B). For the reasons outlined below, I believe that Congress has answered that precise question. The statute expressly states that the sentence of every prisoner in that category “may be reduced.” Ibid. The disposition of this case is therefore governed by the first step in the familiar test announced in Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842-843 (1984), for “Congress has directly spoken to the precise question at issue.” Id., at 842.

I

In drafting the statute in question, Congress was faced with a difficult policy choice: whether the commission of particular crimes made certain categories of offenders so dangerous that the costs of offering them early release in return for the successful completion of a drug treatment program outweighed the rewards. The initial drafts of the bill answered that question in the negative and made all federal prisoners eligible for a sentence reduction of up to one year if they successfully completed a drug treatment program. See, e. g., H. R. Rep. No. 103-320, p. 2 (1993). However, the inclusion of those convicted of violent offenses within the category of those eligible for the inducement soon became a fulcrum of criticism for the larger crime bill within which the statute was embedded. Perhaps as a result of these criticisms, the statute ultimately adopted limited the inducement to “prisoner[s] convicted of . . . nonviolent offense[s].” 18 U. S. C. § 8621(e)(2)(B).

Both the text of the statute and the aforementioned history demonstrate that Congress directly addressed the “precise question” of what offenses ought to disqualify prisoners from eligibility for a sentence reduction, and that its unambiguous answer was “violent offenses.” Under the statute as enacted, those who commit crimes of violence are categorically barred from receiving a sentence reduction while those convicted of nonviolent offenses “may” receive such an inducement.

The BOP regulation challenged here operates to redefine the set of prisoners categorically ineligible for a sentence reduction, a set unambiguously defined in the text of the statute. It does so by taking a group of prisoners whose offenses the Bureau acknowledges are “nonviolent” within the meaning of the statute and imposing the same sanction — categorical ineligibility — upon them as the statute imposes upon violent offenders. In so doing, the Bureau ignores Congress’ express determination that, when evaluating eligibility for a sentence reduction, the salient distinction is the line between violent and nonviolent offenses. By moving this line, the BOP exceeded its authority and sought to exercise its discretion on an issue with regard to which it has none. See, e. g., Chevron, 467 U. S., at 842-843 (“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”); United States v. Haggar Apparel Co., 526 U. S. 380, 392 (1999) (“In the process of considering a regulation in relation to specific factual situations, a court may conclude the regulation is inconsistent with the statutory language or is an unreasonable implementation of it. In those instances, the regulation will not control”).

II

I fully agree with the majority that federal prisoners do not become entitled to a sentence reduction upon their successful completion of a drug treatment program; the words "may be reduced” do not mean “shall be reduced.” Nonetheless, while the statute does not entitle any prisoner to a sentence reduction, it does guarantee nonviolent offenders who successfully complete a drug treatment program consideration for such a reduction.

For every nonviolent offender who participates in a drug treatment program, the BOP may be required to make two individualized determinations: (1) whether he or she has successfully completed that program; and (2), if sc, whether his or her preconviction conduct, postconviction conduct, and prospects for rehabilitation justify a sentence reduction. In evaluating whether or not a particular individual is entitled to a sentence reduction, the BOP may give great weight to whichever of these factors it determines to be most relevant. That, however, is a far cry from categorically excluding from consideration prisoners who Congress explicitly intended to obtain such consideration.

The majority’s concern about the risks and burdens associated with case-by-case decisionmaking in a large number of cases is understandable yet ultimately misguided. In order to fulfill the statute’s requirements, the BOP must already evaluate every prisoner seeking the sentence reduction on an individual basis to determine whether that prisoner “successfully completed” his or her drug treatment program. Individualized consideration of the second salient question involves consideration of many of the same personalized factors that go into determining whether a prisoner’s course of drug treatment has been “successful.” To the extent that answering the second question requires consideration of additional factors with a concomitant administrative burden, the costs of such a scheme are, in Congress’ judgment, outweighed by the benefits of encouraging drug treatment and of carefully distinguishing between those prisoners who have earned an early return to their communities and those who require further incarceration.

The majority’s, worry that individualized decisionmaking might lead to “favoritism, disunity, and inconsistency” is similarly misplaced. Ante, at 244. To suggest that deci-sionmaking must be individualized is not to imply that it must also be standardless. If the Court today invalidated the regulation in question, its decision would not preclude the BOP from adopting a uniform set of criteria for consideration in evaluating applications for sentence reductions. Nor would it necessarily preclude the Bureau from giving dispositive weight to certain postconviction criteria or near-dispositive weight to preconviction criteria. Cf. Heckler v. Campbell, 461 U. S. 458, 467 (1983). The Bureau would remain free to structure its decisionmaking in any way it saw fit as long as in so doing it did not contravene policy decisions explicitly made by the statute’s drafters. As Congress has already addressed preinearceration conduct in § 3621(e)(2)(B), the Bureau may not categorically exclude a prisoner not convicted of a violent offense from consideration for early release on the basis of such conduct without exceeding the limits of its discretion.

Accordingly, I respectfully dissent.

       Title 21 U. S. C. §§ 841(a)(1) and (2) make it unlawful “to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance,” or “to create, distribute, or dispense, or possess with intent to distribute or dispense, a counterfeit substance.” Section 2Dl.l(b)(l) of the Sentencing Guideline's provides for a two-level sentence enhancement if a dangerous weapon was possessed in connection with the commission of a drug offense. See USSG §2D1.1(b)(1) and comment., n. 3 (Nov. 2000).

       To qualify for residential substance abuse treatment, an inmate must be “determined by the Bureau of Prisons to have a substance abuse problem” and be “willing to participate in [the] program.” 18 U. S. C. §§ 3621(e)(5)(B)(i), (ii).

       The dissent straddles the fence, agreeing with Lopez that the statute addresses his case unambiguously, but disagreeing with him on precisely what the statute says. Lopez reads the statute to exclude Bureau consideration of preconviction conduct, Reply Brief 4-5; the dissent reads the same words to permit BOP consideration of such conduct, post, at 248 (opinion of Stevens, J.). These divergent readings hardly strengthen the dissent’s assertion that Congress supplied a definitive answer to the “precise question” at issue. See post, at 245.

       Lopez contends that the Bureau’s creation of additional hurdles to receipt of a sentence reduction defeats Congress’ purpose of giving inmates an incentive to undergo drug treatment. Brief for Petitioner 24-29. In INS v. Yueh-Shaio Yang, 519 U. S. 26 (1996), we said that “[i]t could be argued that if the Attorney General determined that any entry fraud or misrepresentation, no matter how minor and no matter what the attendant circumstances, would cause her to withhold waiver, she would not be exercising the conferred discretion at all, but would be making a nullity of the statute.” Id., at 31. In this case, it is plain that the Bureau has not rendered § 3621(e)’s incentive a nullity. A total of 6,559 inmates have received sentence reductions under § 3621(e)(2)(B), including 2,633 inmates in Fiscal Year 1999 alone. Bureau of Prisons, Substance Abuse Treatment Programs in the Federal Bureau of Prisons, Report to Congress 8 (Jan. 2000). Moreover, inmates who do not qualify for early release, like inmates who do, receive other incentives to participate in substance abuse treatment. See 28 CFR §§ 550.57(a)(1), (3) (2000) (“An inmate may receive incentives for his or her satisfactory involvement in the residential [drug treatment] program,” including “[l]imited financial awards” and “[l]oeal institution incentives such as preferred living quarters or special recognition privileges.”).

       The dissent appears to acknowledge that the Bureau may give “near-dispositive weight to preconviction criteria.” Post, at 249. To the extent the dissent would permit the BOP to accord heavy weight to preconviction conduct, the structured “[i]ndividualized [BOP] consideration” the dissent would allow, post, at 249, seems but a shade different from the forthright categorical exclusion the Bureau has adopted.

        Amici urge reversal on the ground that the Bureau violated the notice and comment requirements of the Administrative Procedure Act when it published the 1997 regulation. Brief for National Association of Criminal Defense Lawyers et al. as Amici Curiae 18-24. We decline to address this matter, which was not raised or decided below, or presented in the petition for certiorari. Blessing v. Freestone, 520 U. S. 829, 340, n. 3 (1997).

       Lopez invokes the rule of lenity in urging us to accede to his interpretation. Because, as discussed above, the statute cannot be read to prohibit the Bureau from exercising its discretion categorically or on the basis of preconviction conduct, his reliance on the rule is unavailing. See Caron v. United States, 524 U. S. 308, 316 (1998) (“The rule of lenity is not invoked by a grammatical possibility. It does not apply if the ambiguous reading relied on is an implausible reading of the congressional purpose.”).

       Throughout 1993 and 1994, Republican leaders gave numerous speeches contrasting their proposed crime bill and the administration’s. One contrast repeatedly stressed was that the Republican bill set aside more money for prison construction while the Democratic bill allocated greater funds to drug treatment. This difference allegedly reflected differing views as to how society should deal with violent criminals. To this end, Republican leaders repeatedly criticized the inclusion of violent criminals in the sentence reduction provision. See, e. g., 139 Cong. Rec. 27209 (1994) (remarks of Sen. Hatch) (“Their treatment allows all Federal prisoners, including the most violent, to have their sentences reduced, if you will, at the Bureau of Prisons’ discretion if they complete a drug treatment program. Boy, I can see where everybody is going to do that. You can imagine the sincerity of that”); 139 Cong. Rec. 27460 (1993) (remarks of Sen. Hatch) (“The Democratic crime bill actually permits the Bureau of Prisons to decrease the sentence of Federal inmates — violent offenders included — who complete drug treatment programs. Their bill also proposes that States be given grant money which can be used to implement home confinement and other alternative sanctions for violent offenders”).

       The House initially approved a version of the bill that would have extended the inducement to all federal prisoners. The Senate, where the criticism of the inclusion of violent offenders was more pronounced, see n. 1, supra, limited the provision to nonviolent offenders. The Conference Committee accepted the Senate’s limitation. H. R. Conf. Rep. No. 103-711, p. 381 (1994).

       The BOP regulation challenged here treats an otherwise nonviolent offense where a gun was carried as a “nonviolent offense” within the meaning of the statute, and the case was argued on that assumption. As the majority notes, ante, at 233-236, the BOP initially attempted to classify such crimes as violent offenses, but receded when the Courts of Appeals divided over the validity of such a construction. The question over which the Courts of Appeals initially divided is not before us today. If it were, the arguments raised by both.sides would be quite different, with the debate likely focusing on whether “nonviolent offense” is best understood as a term of art or in relation to a more colloquial understanding of violence.

       This Court’s decision in INS v. Yueh-Shaio Yang, 519 U. S. 26 (1996), relied upon by the majority, ante, at 242-248, is not to the contrary. Yueh-Shaio Yang did not involve an effort by an administrative agency to categorically exclude from consideration for a benefit a particular class of individuals because of a characteristic considered and rejected by Congress as a basis for categorical exclusion. Rather, that case involved the related yet distinct question whether such a characteristic may be given any weight by the agency in making an individualized case-by-case determination whether to grant the benefit to a particular individual. If the issue in this case were whether the BOP could even consider the nature of the offense in determining whether to grant a particular sentence reduction, Yueh-Shaio Yang would be relevant to our analysis.