This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: spot the deference.
The Supreme Court has taken up several big and important tax cases this term. We've covered Moore v. U.S. on several episodes, and that case deals with whether realization is required by the 16th Amendment. And we'll link to that one in the show notes.
Today we're looking at two cases that could overturn the precedent for agency deference in Chevron and what the Supreme Court's upcoming decision could mean for the tax community.
Here to talk more about this is Tax Notes legal reporter Mary Katherine Browne. MK, welcome to the podcast.
Mary Katherine Browne: Thank you. It's great to be here.
David D. Stewart: So to start off, could you give listeners a quick rundown of Chevron?
Mary Katherine Browne: Certainly. Chevron set a 40-year-old precedent that courts should give deference to regulatory interpretations of ambiguous statutes as long as those interpretations are reasonable. We notably see the Supreme Court use Chevron in a tax context in Mayo Foundation v. United States, when the court upheld a Treasury regulation stating that student employees working at least full-time are categorically ineligible for the exemption from payroll taxes.
David D. Stewart: Now I understand you recently talked with someone about some recent developments. Who did you talk to?
Mary Katherine Browne: I spoke with Frank Agostino, the founder and president of Agostino & Associates, a firm in Hackensack, New Jersey. Prior to entering private practice, Frank had a long history of working as an attorney in the IRS District Council and serving as a special assistant U.S. attorney. He also taught tax controversy at Seton Hall and at Rutgers School of Law. Funnily enough, he's also the first person to introduce me to tax law when he hired me fresh out of law school.
David D. Stewart: All right, what all did you talk about?
Mary Katherine Browne: We talked about the potential fall of the Chevron doctrine and what it means for the tax world. In May of last year, the Supreme Court granted cert in a case called Loper Bright Enterprises v. Raimondo, which involves fishery monitors and whether the National Marine Fisheries Service rule requiring fishery companies to pay them passes muster. The Court also granted cert in a companion case called Relentless v. Department of Commerce. Both cases were heard before the Court in January, and from the commentary we heard from justices seemed to imply that they're leaning on axing Chevron. This doesn't come as a surprise to most legal minds because conservative justices have been highly critical of Chevron and the Court has been pivoting away from Chevron in the past decade.
Frank and I previously discussed the potential fall of Chevron in December in a Tax Notes article on the question surrounding supervisory approval for penalties and how questions with them are going to be handled. In our most recent discussion, we discussed how Chevron's fall will affect the tax world more broadly.
David D. Stewart: All right, let's go to that interview.
Mary Katherine Browne: Welcome, Frank, to the podcast. Thank you for joining us.
Frank Agostino: Thank you for having me.
Mary Katherine Browne: Of course. So let's start from the beginning and it's, what exactly is the Chevron doctrine? How did it develop? And more importantly, why do we care about it in the tax context?
Frank Agostino: Okay, so look, Chevron, let's go back to law school. We have separation of powers, right? Congress makes the laws, the executive enforces the laws, right? We all learned that in law school. We all learned that before. This is how government in the United States is supposed to run. And before the Internal Revenue Code got so complicated and all laws in general got complicated, it wasn't that big a deal to just know that Congress makes the laws, the executive enforces the laws.
But now the laws are designed — Congress doesn't think of everything when they pass a law or they're ambiguous. So what the courts have done, I mean I guess it's '84 with Chevron, but even before, for as long as I have been practicing. I've been practicing before Chevron came out. The courts have deferred to the agencies where Congress, well, allegedly wrote a law that was ambiguous. So more and more they let the executive branch, supposedly in the beginning when we first started years ago, fill in the blanks, right? That you can't think of everything. There were gaps, regulations filled in the gaps.
But what started happening is, the courts started deferring to the agency interpretations or alleged interpretations of the statute, and the regs got more than just filling in the gaps. It was the regs turned into the government's litigating position. So instead of telling you why you're entitled to a charitable deduction, there were regs that told you what defeats the charitable deduction.
So then you get something like Chevron and you have to look at, all right, what is the analysis that applies when you have a regulation? When a taxpayer challenges a reg, how should the court look at it? So step one of the two-step test, has Congress directly spoken on the precise question at issue, right? If the intent of Congress is clear, that should end the inquiry. The reg is either good or bad because we know what Congress wants, so we don't need deference if the statute is clear.
Then if the statute is ambiguous or silent, then you look at whether the agency's answer is based on a permissible construction of the statute, not the best interpretation of the statute, a permissible interpretation of statute. And that back in '84, I guess, is what made the litigators crazy. "This can't be right." Because instead of us trying to figure out what congressional intent was and going on the plain language of the statute, the courts abdicated their function and let the agency determine if it was a permissible construction statute, basically abandoning their role under separation of powers and deferring to the agency. And since that time, conservatives have been trying to convince the courts that Chevron overstated the power of the executive branch and that essentially Chevron did violence to the principles of separation of powers.
So that's really what Chevron is. It's a doctrine that lets the Congress essentially delegate the rulemaking function to executive branch agencies. It's based on the premise that agencies are the experts and that they will act consistent with congressional intent as opposed to acting in their capacity as a litigant that's going to be before the courts, and it has created consternation in the conservatives since '84. Since as long as Chevron has been there, there've been those of us who've thought that maybe there's going to be a time when we need to rethink this.
Mary Katherine Browne: It's kind of interesting that you bring that up because during oral arguments, Justice Brown Jackson was concerned that overturning it would strip experts of the ability to fill in the gaps and define terms in the law, which you kind of just said. And as you and I both know, I mean you brought this up when I was a little baby lawyer, people don't really know tax law until they're five years into it. Is getting rid of federal agency deference truly a good thing when it comes to niche areas of law like tax?
Frank Agostino: OK, so couple of things. So first, as I've said, it takes me five years to train a tax lawyer. Most of the people at the Internal Revenue Service leave before their fifth year. So do I really want the baby tax lawyers making the regs as opposed to the litigants who've been doing it for years, putting up their best and brightest and forcing the Court to listen to all of the arguments, getting all of the amicus briefs that are unique in tax? The people who are affected by the laws and the regulations generally give you amicus briefs: the American College of Tax Council, Harvard Law School, and others.
So Ketanji Brown's position is based on the belief that government is always good, that government is right. But more and more we're learning that the government is a litigant in all of these cases, that the position is motivated as much by the desire to fill in the gaps of what Congress did, that the government's position is sometimes motivated by the position of the agency and the politicians that appoint the head of the agency. Why does regulatory interpretation inside an agency change whenever there is a new president? I mean, if the agencies were the experts and the agencies were doing what we would hope that they were doing, what Ketanji Brown's comments suggest that they were doing, interpreting the law that Congress passed and giving us the best interpretation in the regulations, then we wouldn't have so much Chevron litigation.
It's that they're not doing that. And that's why we have cases like Loper Bright coming up, that the agencies are not doing what we all would wish they were doing: just interpret the laws, fill in the gaps to be consistent with congressional intent.
Mary Katherine Browne: So when we discussed this in the context of supervisor approval for penalties back in December, before even oral arguments started you were pretty sure that Chevron was going to be overturned. And that kind of brings us to the question of what is the standard going to be? Are we just going to get rid of federal agency deference in its entirety? Are we going to fall back on a standard like Skidmore?
Frank Agostino: Well, Skidmore is the right answer. 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. And that's where I think Skidmore brings us, that we need to eliminate this whole concept of tax exceptionalism that really the Chevron, but not only Chevron, right, that many of these people think that, "Oh my God, tax is so complicated that we need special rules for the tax lawyers. Maybe we even need to get to the point where you shouldn't even be a judge looking at this stuff unless you've graduated from NYU's LLM program with a 3.5 or higher." But that's not what it should be. So basically we're saying that politics has made the tax code so complicated that we need to have special rules and special people to tell the American people what should have gone in those boxes on their tax return.
How about we just go back to separation of powers? Congress should make laws, the executive should enforce those laws. And when there is doubt, when there is ambiguity, the Court brings us to the best interpretation of what Congress intended looking at the statutes of construction, plain language, and that if the plain language is ambiguous, we look to the rules of construction. That every lawyer who graduates from every law school anywhere in the United States can come to court and enforce their taxpayer's rights and interpretations, right? Nice and simple.
And by the way, I'm not prejudiced against LLMs, because you know I have an LLM from NYU. I am proud to be one of the graduates of that institution. I just don't think that that made us the princes of the interpretation of the tax code.
Mary Katherine Browne: So we've had a couple of cases that recently in the tax world have dealt with Chevron, things like Lissack v. Commissioner, Oakbrook, Organic Cannabis Foundation v. Commissioner, 3M, and the Coca-Cola case. What impact would overturning Chevron have on those cases?
Frank Agostino: Well, let's think about it. Would Chevron have it or not? Right? You mentioned Oakbrook. But Oakbrook, the Tax Court just reversed Oakbrook because we had a change in the judges from the Oakbrook panel, right? We have more federalists on the Tax Court bench now. So if you looked at, there was a blog that was done by Townsend and said, "Has the law changed? Has the words of the reg changed? Has anything changed other than the composition of the court? And who appointed the judges that are on the court?" No. So Chevron's protection of the agency interpretation isn't working anyway. So yes, Chevron deference is also clouded by the fact that the minute we have ambiguity, then the politics of the people that appointed the tri-factor decision-makers can change the outcome. And that the Valley v. Oakbrook is a perfect example of that. But that's how I think.
How will getting rid of Chevron affect tax controversy? One, let's think about the real small number of lawsuits that are actually brought challenging the regulation. Right? So there's regulations and they go through the comment process for the most part, and there is some input by the constituency. So most regs are not really the subject of litigation. The regs that are, are the ones that the private bar at least believes that the government went, or that the IRS, or the Treasury went beyond.
So Oakbrook. There's a charitable contribution for conservation easement deductions. So the real rule of statutory construction was when Congress passes a law that provides for a charitable deduction, that the construction of the statute is to effect Congress's intent permit to charitable deduction. The IRS, because they had a problem with conservation easements valuation, it's a problem. And valuation cases are really expensive to try to limit the conservation easement deduction by passing perpetuity regs, which most litigants believe went a little further than Congress ever did. It wasn't ambiguity, it was actually just rewriting something that Congress hadn't explained. Right? Perpetuity. And then there's been a lot of litigation about it that has slowed down the resolution of these cases, frustrated both the private bar and the Internal Revenue Service.
So what will happen now that Chevron, well, it's not gone yet, but I'm in the camp that says it's dying. It's on its last death. Maybe we should just put it out of its misery. But when Chevron is officially dead, what will we have? We will have the courts looking at interpretations in the regulations promulgated by the IRS that for the most part, the government is going to get the deference that goes to logical, thought-through positions that are consistent with the plain language of the statute. But when the agency does an overreach and goes contrary to either the plain language of the statute or the traditional rules of construction, the courts will exercise their oversight function over the executive branch and bring us closer to what they believe was either the plain language of the statute, congressional intent, applying the traditional rules of statutory construction.
I don't think there'll actually be a lot more litigation because there isn't a lot of Tax Court litigation. I think that more cases will settle, that the Treasury will think long and hard when they finally promulgate regulations and take more seriously the comments of the taxpayers and the taxpayer groups that comment. And they'll breathe new life into the Administrative Procedures Act to the extent that it now will be applied to the Internal Revenue Service. It'll end tax exceptionalism and bring us to where the Internal Revenue Service is one of the many agencies that have to pass regulations interpreting congressional statutes.
Mary Katherine Browne: All right. We've focused a lot on how the courts and how Treasury and the IRS should handle or will be handled due to the potential fall of Chevron. One question I have, because I see it a lot, especially in the clean energy credits and even in the crypto sphere when it comes to tax regulation, is that a lot of regulation is kind of punted from Congress to the IRS. Do you think with Chevron being gone, that will impact how tax law is being written by Congress?
Frank Agostino: I hope so. I mean, maybe not, but I really do hope so. I think the people at Treasury who advise on statutes and who advise on technical corrections will have to consider that ambiguity may be inconsistent with their goals in passing the statutes. Right? So there are times when I think Congress puts ambiguity in a statute not to have to fight out the details between the proponents and opponents of a statute, say. They punt to the agency.
And then the problem with that is the administrations change. Right? You can have a Democratic administration, you can have a Republican administration, and then the change of interpretation without a change in the words is really bad tax policy. So now my hope is that Congress will say what it means, and the courts will decide that they mean what they say, and that the litigation will be less infused with the political changes and the courts need to say, "No, this isn't a political change. This is a new interpretation of the statute."
Mary Katherine Browne: So I have one last question for you and that is this. What are some practical considerations that practitioners should consider if the Chevron doctrine is overturned?
Frank Agostino: Well, to want to be involved versus more involved in how tax legislation is made. Right? There are people who lobby. They lobby for the high-end dollars and statutes and the Inflation Reduction Act and social steering that happens with passing laws. But they also should lobby constituent services representatives at every representative's office and say, "How does this affect their low-income taxpayer?" Right? One of the classes that we teach is nontraditional tax advocacy. If you are in a low-income community or an LEP community and the IRS's interpretation of a statute appears to be discriminatory, we will then be involved at the grassroots. Go to your congressperson's office, push for technical corrections or changes to the law that make it fair, that make it what Congress should do, which is pass the laws.
Delegating all of this to the agency that enforces the law gives people a feeling that the system's not fair. The same people shouldn't both make the law and enforce the law. That's contrary to the separation of powers that the founders originally intended. So I believe that that is what will happen, that we'll get back to separation of powers. The lobbying effort will not only be on what should be in the regulations, but it'll happen earlier, what should Congress put into the code. And then eventually the code may actually get shorter as opposed to longer and more complex.
Mary Katherine Browne: Well, thank you for that, Frank. You've given us a lot to think about and consider in regards to this issue.
Frank Agostino: Thank you very much.
David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Senior Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?
Jasper B. Smith: Thanks, Dave. In Tax Notes Federal, Timothy Todd and Philip Manns Jr. clarify the proper estate tax treatment of life insurance proceeds used by a company to redeem a decedent-shareholder's stock. Peter Tucci examines the gift and estate taxes inflation adjustment.
In Tax Notes State, Alysse McLaughlin and Kathleen Quinn examine the state tax issues that could arise from the purchase of Inflation Reduction Act credits. Robert Rojas and Michael Pusey offer a comprehensive examination of nexus.
In Tax Notes International, Sarvagya Bilgaiyan and Aditya Singh Chandel explain the challenges of aligning India's domestic tax law with tax treaty nondiscrimination provisions. Stephen Banfield explains how Singapore tax law applies to lending and staking cryptocurrency.
And finally, in Featured Analysis, Joe Thorndike examines Beardsley Ruml's provocative 1946 claims that "taxes for revenue are obsolete."
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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