Supreme Court Overturns Chevron: Navigating The New Landscape For Tax Regulations And Judicial Review

On June 28, 2024, the U.S. Supreme Court issued a landmark decision in Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Department of Commerce (collectively referred to as "Loper Bright") overturning the 40-year-old Chevron doctrine (Chevron U.S.A. v. Natural Resources Defense Council Inc.). This doctrine mandated that courts defer to a federal agency's "reasonable interpretation" of a statute it administers if the law was ambiguous or silent on an issue. In a 6-3 decision, the Court concluded that under the Administrative Procedure Act (APA), courts should not defer to an agency's interpretation solely because the statute is ambiguous. This decision significantly alters the landscape of administrative law, casting uncertainty on the level of deference that tax regulations, which have long benefited from Chevron deference, will receive going forward.

Judicial Review Under Loper Bright

The majority opinion, authored by Chief Justice Roberts and joined by Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett, concluded that the required deference to an administrative agency under Chevron cannot be reconciled with the APA mandate that courts exercise "independent judgment" on all relevant questions of law. Therefore, a reviewing court should rely on traditional tools of statutory construction to independently determine the best interpretation of an ambiguous statute.

Specifically, the APA directs courts to "decide all relevant questions of law" and "interpret constitutional and statutory provisions" without prescribing a deferential standard. While the Court rejected Chevron deference, it emphasized that "exercising independent judgment is consistent with the 'respect' historically given to Executive Branch interpretations [of statutes]." The Court cited its 1944 decision in Skidmore v. Swift & Co., indicating that a court may weigh the persuasiveness of the agency's interpretation in determining "the best reading of the law." However, the distinction between discretionary "respect" and mandatory "deference" may be difficult to discern.

The majority opinion provided that regulations issued pursuant to an express grant of statutory authority are subject to a less stringent standard of judicial review. If a statute delegates discretionary authority to an agency to prescribe regulations, a reviewing court should independently identify the statutory delegation and determine its boundaries. If the agency has engaged in reasoned decision-making within the boundaries of that authority, it appears the court will not substitute its judgment for that of the agency unless the regulations are "arbitrary and capricious," although the Court did not provide explicit guidance addressing the relevance of pre-Chevron cases after Loper Bright.

Initial Take on Tax Regulations

While Loper Bright unequivocally overturns Chevron, it does not specifically address tax regulations. The opinion raises various issues that the courts will need to resolve, such as the distinction between interpretative and legislative regulations. For example, will tax regulations promulgated under Treasury's general authority (section 7805(a)), which allows it to prescribe "all needful rules and regulations for the enforcement" of tax laws, including new legislation, be viewed as an express delegation of discretionary authority to the agency, and therefore subject to a less stringent standard of judicial review? Similarly, how will tax regulations promulgated under a statutory grant of authority to "prescribe such regulations as may be necessary or appropriate to carry out the purposes [or provisions] of [a particular] section," which provides an enumerated list of particular items that should be covered in the regulations, be viewed? Is there a difference if the tax regulations go beyond the scope of the enumerated items or is the generalized grant sufficient to allow the applicable regulations to be judged under the more agency-favorable arbitrary and capricious standard?

The Court stated that earlier cases that applied Chevron may be relied upon despite changes in interpretive methodology, thereby upholding the Court's prior decisions on the validity or invalidity of agency regulations. However, it is unclear how the Court's prior decisions addressing the methods for judicial review of agency actions will apply. For example, in its 2011 decision in Mayo Foundation for Medical Education and Research v. United States, the Court held that the Chevron doctrine applied "with full force and effect in the tax context" and that the nature of judicial review "does not turn on whether Congress's delegation of authority was general or specific." It also held that, in the absence of justification, the Court was not inclined to carve out an approach to administrative review that applies for tax regulations only, and instead stressed the importance of maintaining a "uniform approach to judicial review of administrative action." Thus, the Court's decision to overturn Chevron effectively overturns Mayo Foundation, at least with respect to whether Chevron applies to interpretative regulations. However, it remains uncertain whether the precedent set by Mayo Foundation, which dictates that tax regulations are subject to the same judicial review standards as non-tax regulations, is still valid in light of the Loper Bright decision.

For non-legislative regulations (i.e., interpretative regulations), the Court appears to favor Skidmore deference without explicitly making it the standard. Under the Skidmore doctrine, an agency's interpretive rules are at least "entitled to respect" provided they satisfy four factors: (1) thoroughness, (2) validity of its reasoning, (3) consistency with earlier and later pronouncements, and (4) persuasiveness. Although the Court references Skidmore, there are other lines of authority that the courts might follow, such as National Muffler Dealers Assn. v. United States and its progeny. Regardless of the standard, textualist judges who are unwilling to consider legislative history when interpreting a statutory provision, assuming such history exists, may find applying the Loper Bright standard to tax regulations challenging.

A&M Tax Says

Under Loper Bright, tax regulations, particularly interpretative rules, now will be afforded less judicial deference when challenged by taxpayers, whose own interpretations may be given similar weight as that given to the government. The extent to which taxpayers will venture to take positions contrary to tax regulations remains to be seen, although some uptick in challenges to the validity of tax regulations seems likely. It is safe to say that how Loper Bright applies generally, and specifically to tax regulations, will be litigated in the courts in the years (and decades) to come.

As to the government's response to this decision, it seems certain that Treasury will seek to ensure that the preambles to its tax regulations position it to satisfy the Skidmore standard and the APA requirements. This should also further taxpayers' incentive to participate in the comment process with an eye to a potential future challenge in the courts, as the APA requires an agency to respond to all significant comments, (e.g., those that raise relevant issues, provide new data, or offer alternative solutions). Stay tuned as we will be closely monitoring the developments stemming from Loper Bright that could turn the tax regulatory world upside down.