Tax

In a 6-3 decision written by Chief Justice Roberts, the Supreme Court in Loper Bright Enterprises v. Raimondo overturned the Court’s decision in Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984), and held that federal agency interpretations of law are not entitled to any deference (such as the deference provided to the Department of Treasury (“Treasury”) and the Internal Revenue Service’s (“IRS”) in the promulgation of tax regulations).[1]

The doctrine of administrative deference, established in Chevron, required deference to an agency’s reasonable interpretation of an ambiguous statute, so long as Congress had not spoken directly to the precise question at issue. The two-part test for requiring deference first addressed whether “Congress has directly spoken to the precise question at issue.” If so, the court was required to enforce the “unambiguous express intent of Congress.” To be deemed “ambiguous,” the statute must have two or more reasonable interpretations. If the statute is silent or ambiguous, part two of the test then required the court to defer to the agency’s interpretation of the statute, if reasonable, regardless of whether the court may have a conflicting interpretation.

With its decision, the majority held this framework is inconsistent with the Administrative Procedure Act’s (“APA”) requirement that “court[s] shall decide all relevant questions of law.”  5 U.S.C. § 706.  By overruling what is known as “Chevron deference,” the Court’s opinion may substantially change the administration of taxes, including effects on revenue, costs of tax administration, the promulgation of regulations and, more generally, fairness and certainty for taxpayers. 

The Court’s Decision:

The Court concluded that “[t]he deference that Chevron requires of courts reviewing agency action cannot be squared with the APA,” and it rejected the notion that statutory ambiguities can be presumed to be implicit delegations by Congress to agencies.  The Court explained, “[p]resumptions have their place in statutory interpretation, but only to the extent they approximate reality.  Chevron’s presumption does not.”  In cases where Congress uses a phrase like “appropriate” or “reasonable” that is inherently flexible, the court must “fix[] the boundaries of [the] delegated authority” and “ensur[e] the agency has engaged in ‘reasoned decision making’ within those boundaries.” 

Justice Thomas concurred to explain his view that Chevron deference violates the Constitution’s separation of powers.  Justice Gorsuch also separately concurred to explain why the Court’s decision was consistent with stare decisis.  Justice Kagan dissented, joined by Justice Sotomayor and Justice Jackson, arguing that as a result of the Court’s decision, “[a] longstanding precedent at the crux of administrative governance … falls victim to a bald assertion of judicial authority.”

While the Court limited the scope of its decision slightly by holding that prior decisions relying on Chevron remain good law and that courts may still rely on agency interpretations to the extent they are persuasive (in what is known as Skidmore deference), the decision marks a dramatic change with respect to administrative law going forward.

An Overview of Chevron Deference to Taxing Authorities:

An agency’s ability to issue binding guidance is generally subject to various judicial doctrines, which can be grouped into three levels commonly referred to as Chevron, Skidmore, and Auer deference.[2]

• Chevron Deference. Chevron, prior to being overturned, was the highest level of deference and traditionally has been applied to tax regulations. Before 2011, not all lower courts agreed that tax regulations were eligible for Chevron deference. This changed, however, in 2011, with the Court’s holding in Mayo Foundation for Medical Education & Research v. United States 131 U.S. 704 (2011), in which the Court confirmed that Chevron applies to tax regulations (irrespective of whether they are interpretative or legislative in nature). This result clarified the ambiguity raised by United States v. Mead Corp 533 U.S. 218 (2001) and National Muffler Dealers Association v. United States 440 U.S. 472 (1979).
• Skidmore Deference. Skidmore deference has traditionally been applied to other forms of published guidance such as preambles to regulations, revenue rulings and procedures, notices and announcements. Before Chevron, the Court in Skidmore had promulgated a less deferential standard (in a case not involving tax regulations), which considered whether an agency’s interpretation is thoroughly considered, well-reasoned, and consistent with prior agency position through a multi-factor assessment – thereby focusing on the level of persuasiveness of the agency’s position. Unlike Chevron deference, there are no set requirements to satisfy before a court will defer to the agency’s position; rather, the court will look at several factors and determine whether, under the circumstances, it should defer to the agency’s interpretation.
• Auer Deference. Auer deference is a unique standard that potentially applies to IRS interpretations of the IRS’s own ambiguous regulations. If certain conditions are met, the IRS’s interpretation will be afforded controlling deference based on the theory that the agency is the best party to interpret its own regulations.

While the Court’s decision in Loper Bright eliminated Chevron deference and its applicability to tax regulations, it is worth noting, as stated above, that the Court limited the scope of its decision slightly by holding that prior decisions relying on Chevron remain good law. Furthermore, the Court’s explicit statement in its opinion that courts may still rely on agency interpretations to the extent they are “persuasive”, indicates that the deference standards provided by Skidmore and Auer remain good law and should continue in force in a post-Chevron era. In this respect, Tax Court Judge Elizabeth Ann Copeland was quoted at a recent tax controversy forum stating that “[t]he U.S. Treasury Department and the Internal Revenue Service have special competence in drafting tax regulations, so the Tax Court will continue to lend considerable credence to the agencies’ rules.”[3]

Post-Chevron Effects on Tax Law – A Sea of Uncertainty:

Only time will tell what impacts the Court’s decision in Loper Bright may have on the administration of tax laws. Provided below are preliminary observations on some (but definitely not all) of the potential impacts of the Loper Bright decision.

Revenue Consequences.

By overturning Chevron, courts no longer are bound to uphold IRS regulations as authoritative interpretations of ambiguous statutes. The reinterpretation and litigation of issues could trigger a generational upheaval in tax law. As such, seemingly subtle differences in these interpretations could have substantial effects on federal revenues. Challenges to Treasury regulations typically involve taxpayers contending they owe less tax. To state the obvious, where those challenges are successful, the impact would result in a reduction in federal tax revenue.

For example, profit shifting by multi-nationals is estimated to cost tens of billions of dollars in corporate tax revenue per year.[4] The transfer pricing rules contained in Section 482[5] are general and brief, so Treasury and the IRS promulgated regulations designed to clarify and address certain perceived ambiguities within the statute. In 2019, Altera challenged these regulations and the Ninth Circuit, applying Chevron, found that Section 482 was silent and that Treasury’s choice of a profit allocation method was a “reasonable” interpretation.[6] Now that Chevron has been overruled, future litigation may result in a different outcome that could favor taxpayers like Altera and, therefore, reduce federal tax revenues.

Weil Tax Observation: Decisions such as those in favor of the IRS against 3M and Coca-Cola last year might successfully be appealed (and, if such companies are now successful, the refunds payable to such companies would result in a reduction in federal tax revenues).[7]

General Administration of Tax Law.

The overturning of Chevron deference could also affect how an agency interprets a statute when it promulgates regulations for fear that a court may disagree with that interpretation. In a recent report published by the Congressional Research Service (the “CRS”), it was indicated that:

88% of agency rule drafters either “agreed” or “somewhat agreed” that Chevron made them more willing to adopt a more aggressive interpretation. The loss of Chevron deference, therefore, might lead Treasury to write more taxpayer-friendly original regulations, which could lead to less revenue.[8]

The CRS Report goes on to indicate that, post-Mayo,[9] Treasury increased incentives to use the APA’s notice and comment rulemaking to align its interpretations with Chevron deference (an approach the IRS adopted in its own manual); thereby increasing the government’s chances of receiving judicial deference and prevailing in challenges to its regulations. With the end of Chevron deference, Treasury and the IRS will likely be required to bolster the “persuasiveness” of a regulation to align with Skidmore, which will necessarily precipitate further consultation and collaboration with practitioners such that their interpretations stand up to judicial scrutiny notwithstanding the lack of Chevron deference.

Increased Variability in Application of Law.

Congress could consider whether the demise of Chevron could cause fairness disparities to similarly situated taxpayers. While critics of Chevron have argued that agencies are not impartial, and that it is unfair for an agency to both interpret a statute via the regulatory process and enforce that statute, an increased role for the judiciary would conversely lead to greater variability in tax law interpretation. Rather than speaking in one regulatory voice, the taxing authority would be disaggregated. Judges do not necessarily arrive at uniform and broadly consistent views, and taking into account technical complexities of tax law, the decisions that are reached may foment disparate outcomes. The “frankensteined” approach that arises as a result of judicial determinations may significantly complicate tax planning and compliance for all taxpayers. Clear, unambiguous statutes can guide tax policy without the involvement of the judicial system—even in a post-Chevron world. Below we have highlighted several regulatory examples that may be ripe for challenge in a post-Chevron world:

• Transfer Pricing. As noted above, transfer pricing and profit shifting by multi-nationals may be a hotly contest area ripe for litigation – due to Section 482’s lack of regulatory delegation and sparse delineation on appropriate profit allocation methods. Cases like Altera may have a different outcome in the future than they did just several years ago. Query whether Treasury and the IRS’ interpretation of Section 482 will withstand challenge under a Skidmore deference system.
• Debt Equity. Section 385 is designed for determining when nominal corporate debt is treated as equity for tax purposes. Prior to the Court’s holding in Loper Bright, several commentators have questioned whether the delegation of regulatory authority under Section 385 was either too broad or whether the “recast regulations” as written dramatically exceed the statutory scope of the delegation of regulatory authority granted to Treasury. 
• Tax Cuts and Jobs Act (“TCJA”) regulations. The TCJA contained many changes to U.S. federal income tax law.  For example the TCJA disallowed or scaled back a number of deductions, revised international tax rules, altered cost-recovery provisions, reduced the corporate tax rate, and allowed a pass-through deduction for unincorporated business. To the extent these provisions are ambiguous and the subject of regulations that attempt to clarify ambiguities, Chevron deference would have made it easier for the Treasury to defend those regulations.  In a post-Chevron world, the courts, rather than Treasury, will need resolve whether the regulations seeking to clarify those statutory ambiguities pass muster under Skidmore deference. 

The above are just a handful of examples that could be the subject of challenges in a post-Chevron world.

[1] For a further discussion of the Supreme Court’s ruling in Loper Bright, see Weil’s SCOTUS Term in Review post entitled, “Supreme Court Abolishes Judicial Deference to Agency Interpretations of Law”, released on June 28, 2024.

[2] Skidmore v. Swift & Co., 323 U.S. 134 (1944); Auer v. Robbins, 519 U.S. 452 (1997)

[3] See Kat Lucero, “Chevron Ruling No Sea Change for Tax Court, Judge Says,” Law360, Tax Authority (June 28, 2024).

[4] CRS, “The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration”, In Focus(April 8, 2024) (hereinafter, the “CRS Report”).  

[5] Unless otherwise indicated, all references in this article to “Section” are to the Code, and all references to “Treasury Regulations Section” are to the U.S. Treasury Department Regulations (i.e., the Treasury Regulations) promulgated under the Code.

[6] Altera Corporation & Subsidiaries v. Commissioner, 926 F.3d. 1061 (2019)

[7] 3M Co. v Commissioner 160 T.C. No. 3 (2023); Coca-Cola Co. & Subs. v Commissioner 155 T.C. 145 (2020).

[8] CRS Report, (April 8, 2024).  

[9] Mayo, 131 U.S. at 704.