IRS Says Loper Bright Doesn’t Apply to Antiabuse Rule Validity

July 10, 2024

Christopher G. Conway, Esquire
Clerk, U.S. Court of Appeals
for the Seventh Circuit

Everett McKinley Dirksen
U.S. Courthouse
219 South Dearborn Street
Room 2722
Chicago, IL 60604

Re:Tribune Media Co., et al. v. Commissioner of Internal Revenue (7th Cir. — Nos. 23-1135, 23-1136, 23-1242, 23-1243)

Dear Mr. Conway:

The Commissioner responds to petitioners' letter concerning Loper Bright Enterprises v. Raimondo, — S. Ct. —, 2024 WL 3208360 (2024). Loper Bright overruled Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). But as petitioners acknowledge, the Commissioner has not relied on Chevron to establish the validity of the partnership anti-abuse rule in Treas. Reg. §1.701-2. (See Commissioner Reply-Ans. Br. 21-27.)

Petitioners challenge the Commissioner's authority to issue the regulation. But the partnership anti-abuse rule targeted by petitioners is rooted in well-established caselaw combating tax abuse. (Id.) Nearly 60 years before §1.701-2 was promulgated, the Supreme Court upheld the Commissioner's determination that a corporate reorganization, which met technical statutory requirements, nonetheless “was without substance and must be disregarded” for federal tax purposes. Gregory v. Helvering, 293 U.S. 465, 467-70 (1935). The §1.701-2 anti-abuse rule is directly traceable to Gregory and its progeny. (Commissioner Reply-Ans. Br. 24-27.) And the business-purpose requirement in §1.701-2(a)(1), on which the Commissioner's appeal focuses, also is consistent with Congress's more recent codification of the judicial economic-substance doctrine, I.R.C. §7701(o). (Id. 25-26.)

The partnership anti-abuse rule, moreover, comfortably fits within the regulatory authority (now codified at I.R.C. §7805(a)) that Congress has granted in the tax arena since the Revenue Act of 1918 — and petitioners have not argued otherwise. ( Id. 22-24.) Section 7805(a) is “essential to efficient and fair administration of the tax laws” because the tax system is “complex,” and the IRS “must be able to exercise its authority to meet changing conditions and new problems.” Bob Jones Univ. v. United States, 461 U.S. 574, 596 (1983).

Tribune Media Company created such problems by attempting to abuse federal tax rules to avoid a prodigious tax bill when it sold the Chicago Cubs and related assets. That ran afoul of, among other things, the §1.701-2 partnership anti-abuse rule. And that rule is supported by a long and unbroken history of judicial doctrines and congressional enactments empowering the IRS to combat the kind of chicanery attempted here.

Sincerely,

NORAH E. BRINGER
Attorney for the Commissioner