On June 28, the U.S. Supreme Court sent shockwaves through the legal system by overturning one of the foundational precedents of American administrative law. In Loper Bright Enterprises v. Raimondo, the Court, in a 6-3 decision, reversed the longstanding rule of Chevron v. Natural Resources Defense Council that mandated judicial deference to administrative agencies' reasonable interpretations of vague or ambiguous statutes. This ruling has introduced considerable uncertainty about the validity of current and future administrative rules involving everything from financial markets to food safety to clean air and water. That uncertainty extends to tax law as well—including uncertainty as to the scope of the decision itself.
The question directly at issue in Loper Bright had little to do with taxation. Rather, the case concerned whether those operating fishing vessels in the Atlantic herring fishery are required to bear costs associated with observers that the National Marine Fisheries Service ("NMFS") requires they carry on board for the purpose of collecting data necessary for the conservation and management of the fishery. The relevant statute did not specify how these costs should be borne, and the NMFS had promulgated regulations requiring fishing vessel operators to bear those costs in certain circumstances. Fishing vessel operators sued to challenge the regulations.
Under Chevron, federal courts review the validity of administrative rules interpreting statutes using a two-step process. First, they ask whether the statute speaks to the precise question at issue. If the meaning of the statute is clear, then that meaning controls and the inquiry ends. If the statute is silent or ambiguous with respect to the specific issue, however, then the court must defer to the agency's interpretation so long as it is based on a "permissible construction of the statute," on the grounds that Congress is presumed to believe that the agency it tasked to administer the statute is better positioned to interpret the statute's finer points than nonspecialist judges. In Loper Bright, however, the Supreme Court ruled that this two-step process, first announced 40 years ago in Chevron, was precluded by a 78-year-old provision of the Administrative Procedure Act that requires courts to "decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of any agency action." The Supreme Court read this provision to require a judicial review without any deference to the agency's interpretation of the relevant statutory provisions, describing the presumption that Congress would want courts to defer to agency interpretation as "a fiction."
How this new rule will apply to tax regulations is unclear. Treasury Regulations, promulgated by the U.S. Treasury Department and Internal Revenue Service, contain myriad "gap-filling" provisions designed to clarify, expand upon, or close perceived loopholes in, the statutory provisions of the Internal Revenue Code. Since the Supreme Court's 2011 decision in Mayo Foundation v. United States, courts have applied Chevron deference to these regulations. Now that courts are no longer required by Chevron to defer to the Treasury's interpretations of the Code and are instead invited by Loper Bright to exercise their "independent judgment," many fear that these Treasury Regulations may now be vulnerable to challenge.
There are, however, reasons to believe that the impact of Loper Bright may not be as significant as it may seem initially, at least in some areas of administrative law. In particular, the Loper Bright majority opinion emphasizes that Chevron was a judge-made rule for interpreting ambiguous statutes, repeatedly arguing that there is little reason to presume that Congress would, as a general matter, want those ambiguities resolved by agencies rather than courts. The decision suggests, however, that in cases where Congress has expressly granted authority to an agency to "fill up the details" of a statutory scheme, "courts must respect the delegation." In such cases, at least as a purely formal matter, Loper Bright appears to leave judicial deference undisturbed.
As it happens, the Internal Revenue Code contains numerous provisions expressly granting the Treasury Department authority to enact tax regulations. At its broadest, Section 7805(a) provides that the Secretary of the Treasury "shall prescribe all needful rules and regulations for the enforcement of" the Code generally. At the other end of the spectrum, many sections of the Code contain a paragraph (generally towards the end) specifically granting the Treasury authority to implement regulations "to carry out the purposes of this Section" (or words to similar effect). Indeed, some sections of the Code, such as Section 482 (transfer pricing between entities under common control) and Section 1502 (consolidated tax returns of corporate groups) consist of little other than an instruction to the Secretary of the Treasury to prescribe regulations governing the areas at issue. That said, it is unclear as a practical matter how courts will view Treasury Regulations passed under these express grants of authority, or indeed whether they will apply a one standard of deference to regulations passed pursuant to authorizations in particular Code sections and another to those relying only on Section 7805(a)'s blanket grant of authority.
One perverse second-order effect of this ruling may be to discourage agencies, such as the Treasury, from releasing regulations in the first place. In recent years, Treasury and the IRS have expended considerable resources producing proposed Treasury Regulations and shepherding them through the process of notice-and-comment rulemaking to finalization. The prospect that any regulations they produce may be invalidated by judges, who read the relevant statute differently, may simply encourage the IRS and other agencies to make policy more informally (such as through notices or revenue procedures) and formally assert them only in the form of audit and litigation positions.
While the ultimate impact of Loper Bright on Treasury Regulations will take years to sort itself out, one thing is virtually certain: the near future will see a considerable increase in court challenges to the validity of tax regulations. Indeed, within days of the high court's ruling, attorneys representing the Tribune Company and 3M in appeals before the Seventh and Eighth U.S. Circuit Court of Appeals, respectively, sent letters to those courts suggesting that Loper Bright supports an argument that the Treasury Regulations at issue in their respective cases are invalid. Those letters came in the context of cases already well into the litigation process. Over the next few years, we can expect a fleet of actions launched by litigants trawling the waters of the federal judiciary for tax benefits to be found by invalidating Treasury Regulations. What they will haul in at the end of the day remains to be seen. The cost, however, will almost certainly be borne by anyone—taxpayers, their advisors and government agencies—looking for certainty in the meantime.
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