At the end of its 2023 term, the Supreme Court issued two opinions that will drastically change how taxpayers can challenge Department of Treasury (Treasury) and Internal Revenue Service (IRS) regulations and significantly impact tax administration.
On June 28, 2024, the Supreme Court issued a 6-3 opinion, divided among ideological lines, in Loper Bright Enterprises v. Raimondo that overturned the 40-year old doctrine of judicial deference to reasonable administrative agency interpretations of ambiguous federal statutes announced in Chevron v. NRDC.1 Chevron established that if a federal agency applied and interpreted a statute in a reasonable manner, such interpretation is entitled to judicial deference.2
Chevron relied on the premise that federal agencies have the specialized expertise to interpret legislation and issue regulations in specialized areas of law and for highly regulated industries. In tax cases, this meant that courts would often defer to technical Treasury and IRS regulations interpreting the Internal Revenue Code.
Before the ink barely dried in the Loper Bright decision, the Supreme Court issued another 6-3 opinion, divided among ideological lines, three days later in Corner Post v. Board of Governors of the Federal Reserve that effectively expands the statute of limitations for challenging agency regulations by holding that challenges to federal regulations may be able to be brought many years after the regulation took effect, depending on when the challenger was injured by the regulation in question.3
Taken together, these decisions may open the door to several new cases challenging Treasury and IRS rules and regulations.
Supreme Court Overturns Chevron Deference
Loper Bright holds that Chevron deference was inconsistent with the judiciary's exclusive authority to interpret the meaning of statutes.4 The Court emphasized the doctrine's incongruity with Section 706 of the Administrative Procedures Act (APA), which directs that in review of agency action, "the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action."5 The Supreme Court explained that while an executive agency's interpretation of its authority could be persuasive under Skidmore deference,6 depending on the facts, it cannot be binding on a reviewing court.7
The decision's penultimate paragraph aptly summarizes the new paradigm:
Chevron is overruled. Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.8
Taxpayers Can Now Challenge an Agency Action Until First Injured by an Agency Action.
In a case that is not quite as far reaching, the Supreme Court held in Corner Post that a claim under the APA to challenge an agency action first comes into being when the plaintiff is injured by final agency action, not necessarily when the agency action (such as a final rule) is first promulgated.
The APA has a six-year statute of limitations to challenge agency rules that requires "the complaint to be filed within six years after the right of action first accrues."9 In the "Durbin Amendment" to the Dodd-Frank Act, Congress directed the Federal Reserve Board to adopt regulations implementing a reasonable debit card swipe fee, i.e., the fee that banks charge merchants to process a debit transaction.10 The Federal Reserve Board adopted rules in 2011; and if the six-year statute of limitations were applied based on when the rule was adopted, new cases challenging the rule on its face could not be brought after 2017.
Corner Post, a business that did not even exist at the time the regulations were adopted, argued that it would be fundamentally unfair to deprive it of its day in court simply because others had already had six years to challenge the rule. The Supreme Court concluded that the six-year statute of limitations could not be strictly applied to deny a business that did not exist when the regulation was initially promulgated an opportunity to challenge the regulation. The Court held the statute of limitations begins to run when the rule is first applied to the business.11 The Court rejected arguments that the point of accrual for challenging regulations should be measured from the date any plaintiff was injured. Instead, the Court considered "deep-rooted historic tradition that everyone should have his own day in court."12
Impact on Taxpayers
Taxpayers are already starting to use the Loper Bright decision. In Tribune Media Co. v. Commissioner, the taxpayer is appealing a Tax Court decision and wrote to the Seventh Circuit to urge the court to apply Loper Bright scrutiny to review Treasury's assertion of authority to promulgate partnership anti-abuse regulations.13 In 3M Co. v. Commissioner, the taxpayer filed a similar letter with the Eighth Circuit arguing that Loper Bright's reversal of Chevron nullifies the Tax Court's argument regarding an ambiguity in the transfer pricing statute and regulations that warrants reversal of the Tax Court's opinion.14
In recent years, courts have struck down Treasury and IRS regulations for violating the APA and this trend is likely to continue. Corner Post, paired with the opinion in Loper Bright, has potential to open a range of longstanding Treasury and IRS regulations to new challenges. As a result, taxpayers should consider the tax positions taken in previously filed returns to determine whether to file a refund claim or protective claim.
However, the Supreme Court warned in Loper Bright that it would not reconsider its prior decisions that had been decided under Chevron simply because Chevron had been overruled and that statutory stare decisis would continue to control.15
It is likely that courts of appeals will adopt the same rule—meaning that the circuit courts are unlikely to reconsider settled decisions simply because Chevron has been overruled. As the Corner Post case illustrates, it might be possible to challenge a regulation in a different circuit where it had not been previously challenged, as long as a new plaintiff could be found that has the regulation applied to it for the first time within the last six years. This is likely to lead to a much busier docket for the next several years and beyond for the Supreme Court and courts of appeals as well.
Footnotes
1. Loper Bright Enters. v. Raimondo, Nos. 22-451 and 22-129, Slip Op. (U.S. Jun. 28, 2024), available at https://www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf.
2. Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).
3. Corner Post, Inc. v. Board of Governors of the Federal Reserve System, No. 22-1008, Slip. Op. (U.S. July 1, 2024), available at https://www.supremecourt.gov/opinions/23pdf/22-1008_1b82.pdf.
4. Loper Bright at 7-9.
5. Id. at 13-14 (citing 5 U.S.C. § 706).
6. The name comes from Skidmore v. Swift & Co., 323 U. S. 134 (1944), which held that the "interpretations and opinions" of the relevant agency, "made in pursuance of official duty" and "based upon . . . specialized experience," "constituted a body of experience and informed judgment to which courts and litigants could properly resort for guidance," even on legal questions. Id. at 139–140. "The weight of such a judgment in a particular case...depends upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control." Id. at 140.
7. Loper Bright at 21.
8. Id. at 35.
9. 28 U.S.C. § 2401(a).
10. 15 U.S.C. §1693o–2(a)(3)(A).
11. Corner Post at 10.
12. Id. at 21-22.
13. Letter from Joel V. Williamson, Counsel for Tribune Media Company to Christopher G. Conway, Clerk of Court, U.S. Court of Appeals for the Seventh Circuit, Re: Tribune Media Company v. CIR, Nos. 23-1135, -1136, -1242, & -1243 (Jul. 3, 2024), available at https://www.taxnotes.com/tax-notes-today-federal/litigation-and-appeals/tribune-media-says-loper-bright-applies-antiabuse-rule-validity/2024/07/09/7kggb.
14. Letter from Jonathan C. Bond, Counsel for 3M Company to Maureen W. Gornik, Acting Clerk of Court, U.S. Court of Appeals for the Eighth Circuit, Re: No. 23-3772, 3M Company & Subsidiaries v. Commissioner of Internal Revenue—Notice Of Supplemental Authorities Pursuant To Federal Rule of Appellate Procedure 28(j) (Jul. 3, 2024), available at https://www.taxnotes.com/tax-notes-today-international/litigation-and-appeals/3m-says-loper-bright-supports-reversal-transfer-pricing-appeal/2024/07/09/7kgg7.
15. Loper Bright at 34.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.