Following the Supreme Court’s decision overturning federal agency regulation deference, tax professionals are predicting significant changes in tax law, including the end of tax exceptionalism, a rise in litigation challenges, and the issuance of more informal guidance.
In a 6-2 decision in Loper Bright Enterprises v. Raimondo, the Court on June 28 overturned a 40-year precedent that directed courts to give deference to regulatory interpretations of ambiguous statutes as long as the regulators’ interpretations were reasonable. Justice Ketanji Brown Jackson recused herself from the case, but joined the dissent on the related case that also overturned Chevron (Relentless Inc. et al v Dept of Commerce), making that decision 6-3.
“Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do,” Chief Justice John G. Roberts Jr. wrote in the majority opinion. “The Framers anticipated that courts would often confront statutory ambiguities and expected that courts would resolve them by exercising independent legal judgment.”
Decided in 1984, Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), established the proposition that if a federal agency applied and interpreted a statute in a reasonable manner, its interpretation is entitled to judicial deference.
In May 2023 the Supreme Court granted certiorari in Loper Bright, which raised the question whether a National Marine Fisheries Service rule requiring fishing companies to pay for fishery monitors passes muster.
Before oral arguments, several justices stated that they thought the Chevron doctrine was a violation of separation of powers and an obstacle to reaching the best reading of a statute. The Court had already been chipping away at Chevron for years — sometimes by ignoring it, sometimes by inventing one-off ancillary doctrines such as the major questions doctrine in West Virginia v. EPA, 142 S. Ct. 2587 (2022).
Oral arguments in Loper Bright were heard January 17.
Skidmore Consideration
In the decision, Roberts wrote that while courts shouldn’t defer to an agency’s interpretation of an ambiguous statute, they can consider the standard set in Skidmore v. Swift & Co., 323 U.S. 134 (1944).
Under Skidmore, an agency’s interpretation is given weight according to its persuasiveness. The amount of weight given to an administrative judgment in a specific instance depends on “the thoroughness evident in its consideration, the validity of its reasoning, [and] its consistency with earlier and later pronouncements,” the Court wrote in Skidmore.
Frank Agostino of Agostino & Associates PC called Skidmore “the right answer” in an April Tax Notes interview.
“Logic and the application of the traditional rules of statutory construction to persuasively argue based on the plain language of the statute and the legislative history — what Congress intended — should be the standard,” Agostino said.
Initial Thoughts
Diana L. Erbsen of DLA Piper said she wasn’t surprised to see a reference to Skidmore in the opinion and pointed out that the opinion distinguishes between regulations promulgated under a specific grant of legislative authority and those that are merely interpreting ambiguous statutes.
Speaking June 28 at a conference sponsored by the New York University School of Professional Studies, Erbsen and other tax professionals suggested that the opinion in Loper Bright wouldn’t upend the regulatory process too dramatically.
“I wouldn’t expect pure deference, but I would absolutely continue to expect a reasonable reliance on what absolutely is expertise at Treasury and expertise at other agencies. Were that to be completely abandoned, you likely would have seen different authors,” said Erbsen, noting that Roberts wrote the majority opinion rather than either Justice Neil M. Gorsuch or Justice Clarence Thomas.
Tax Court Judge Elizabeth A. Copeland agreed that Treasury and the IRS have special expertise in interpreting tax statutes. She added that she would continue to give substantial weight to statutory interpretations in Treasury regulations and that she expected little change in the expectation that judges would read and consider those regulations in future cases.
Still, IRS Chief Counsel Marjorie Rollinson said the Loper Bright decision could increase the difficulty of writing regulations because regulators would now need to both comply with the Administrative Procedure Act and be prepared to persuade any judge that their interpretation is the correct one.
Steven Toscher of Hochman Salkin Toscher Perez PC noted that taxpayers and tax professionals will still want regulatory guidance on tax statutes in the wake of Loper Bright. The decision shouldn’t change much, he said.
End of Tax Exceptionalism?
However, other professionals view the fall of Chevron as a huge blow to the doctrine of tax exceptionalism — the idea that rules governing taxes should be viewed differently than other forms of regulation.
“Loper Bright will create a sea change in tax law, an area of administrative law perhaps more dependent on regulations than any other,” David W. Foster of Kirkland & Ellis LLP told Tax Notes. “What is clear is that the days of judicial deference to any reasonable Treasury or IRS interpretation of the Internal Revenue Code are over.”
Eric J. Konopka of Latham & Watkins LLP said the decision “levels the playing field between taxpayers and the government.”
“It reaffirms the fundamental principle stated by the Court in Marbury v. Madison and embedded in the Administrative Procedure Act that it is up to courts — not agencies like Treasury and the IRS — to say what the law is. That principle is as true in tax as it is in other areas,” Konopka said.
More Challenges Expected
Tax attorneys also expect to see more challenges to Treasury and IRS administrative actions, especially because the Supreme Court provided a broad interpretation of courts’ power to interpret statutory ambiguities.
“I was expecting a more narrow ruling from the Court,” said Carina C. Federico of Crowell & Moring LLP. She noted that the number of APA challenges seems to rise every year and that she expects Loper Bright to fuel even more.
Foster pointed out that the Court recognized that certain statutes — such as the Internal Revenue Code — delegate discretionary authority to federal agencies. However, it didn’t provide much guidance on how the courts should interpret the boundaries of delegated authority, he said.
“The case raises immediate questions about the extent to which Congress has delegated to Treasury and the IRS the authority to interpret ambiguities in the Internal Revenue Code. We should expect to see more litigation on interpretations in preexisting regulations, at least until this question is settled,” said Jonathan R. Black of Caplin & Drysdale.
David G. Noren of McDermott Will & Emery said the decision would place more demands on Treasury and the IRS to put out “necessary and effective guidance that will pass muster with less deference.” He predicted that Congress and Treasury “will face a significantly more challenging environment, and successful regulation validity challenges by taxpayers likely will become more common.”
Foster advised practitioners to read Loper Bright carefully and analyze whether the rules embodied in government regulations reflect “the best construction” of the IRC rather than a reasonable one.
Regulation Change-Up
Some predicted that the overturning of Chevron could lead to changes in how Treasury and the IRS provide guidance to taxpayers.
Black said the government may be less willing to expend resources on drafting regulations when its authority to do so is unclear. He pointed out that there are instances when there is no express delegation of authority for the IRS to interpret statutory provisions by regulation, such as in section 6751(b).
“The IRS recently proposed regulations interpreting the ‘initial determination’ of a penalty assessment under section 6751(b). These proposed regulations essentially put forth the IRS’s litigating position, which is clearly not the best interpretation of the statute,” Black said. “In cases such as these, I would expect the proposed regulations to be sidelined indefinitely, if not withdrawn altogether.”
Federico agreed, saying Treasury and the IRS could shift toward less formal guidance that can be issued faster.
“However, I also think that the IRS has seen the benefit to receiving and considering taxpayers’ and tax practitioners’ input when issuing guidance,” Federico said. “For example, with the [Inflation Reduction Act] clean energy tax credit guidance, there are so many types of technology and energy projects covered, and the IRS is learning a great deal from the taxpayers and tax professionals that submit comments and engage in discussions.”
Correction, July 11, 2024: Loper Bright was decided 6-2, not 6-3, because Justice Ketanji Brown Jackson recused herself from the case.