In a landmark decision, the Supreme Court has overruled the Chevron doctrine, fundamentally altering the landscape of administrative law and significantly impacting federal tax administration. Six justices, with Chief Justice Roberts writing for the majority, held that the Administrative Procedure Act (“APA”) requires courts to exercise independent judgment in deciding whether an agency has acted within its statutory authority and that courts may not defer to an agency interpretation of the law.
Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.
For more than 40 years, the two-part test laid down in Chevron governed whether courts deferred to administrative agencies in interpreting federal law. Under step one, courts would determine whether “Congress has directly spoken to the precise question at issue,” or “if the statute is silent or ambiguous with respect to the specific issue.”1 Under step two, if the statute is silent or ambiguous, courts were required to defer to the agency’s interpretation if it is “based on a permissible construction of the statute.”2 A key underpinning of Chevron was that federal agencies have special expertise in interpreting the laws. In tax cases, this frequently meant that courts would defer to regulations promulgated by the Department of the Treasury (“Treasury”) interpreting the Internal Revenue Code. Although Loper Bright does not involve tax regulations, it is clear from the opinion, as well as the Supreme Court’s decision in Mayo Foundation v. United States, 562 U.S. 44 (2011), that tax laws are not exempt from the APA and the general rules of administrative law.
The Loper Bright Opinion
The decision in Loper Bright rests upon the Court’s interpretation of APA and pre-Chevron caselaw, with a heavy focus on Separation of Powers between the Judicial and Executive Branches. As the opinion states:
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.3
The Court rejected the idea that where a statute is silent, that silence should be interpreted as an implicit delegation of authority to the agency to interpret the law. The Court was dismissive of the idea that administrative agencies have particular expertise in interpreting the law. “Presumptions have their place in statutory interpretation, but only to the extent that they approximate reality. Chevron’s presumption does not, because an ambiguity is simply not a delegation of law-interpreting power. Chevron confuses the two.”4 In the view of the Supreme Court, it is the courts — not the agencies — that have the necessary expertise to interpret statutes: “Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do.”5 Rather, agency interpretation may have “power to persuade, if lacking power to control.”6
Of particular note for the ongoing debate about the proper place of the economic substance doctrine in tax cases, the Court in Loper Bright focuses on the importance of tools of statutory interpretation. It says: “The very point of the traditional tools of statutory construction — the tools courts use every day — is to resolve statutory ambiguities.”7
Although Loper Bright represents an enormous shift in interpretive methodology, the Court was careful to state that it was not reversing prior decisions resolved under Chevron. “The holdings of those cases that specific agency actions are lawful . . . are still subject to statutory stare decisis despite our change in interpretive methodology.”8
Justice Kagan wrote a sharply worded dissent, joined by Justices Sotomayor and Jackson.9 The dissenting justices took aim at the shift in the Court’s jurisprudence, stating “[i]n recent years, this Court has too often taken for itself decision-making authority Congress assigned to agencies.”10 The dissent goes on to say: “A longstanding precedent at the crux of administrative governance thus falls victim to a bald assertion of judicial authority. The majority disdains restraint, and grasps for power.”11 The dissent concludes that the decision in Loper Bright “will cause a massive shock to the legal system, casting doubt on many settled constructions of statutes and threatening the interests of many parties who have relied on them for years.”12]
What’s Next
The decision in Loper Bright joins a series of decisions reviving the meaning of the APA. We already have seen the impact of CIC Services, LLC v. Internal Revenue Service on federal tax rulemaking. We are almost certainly at the beginning of a wave of challenges to regulations and other rules issued by the Treasury and the Internal Revenue Service (“IRS”) that will follow the script laid out in Loper Bright. The Court’s decision in Corner Post, Inc. v. Board of Governors of the Federal Reserve System,13 confirming that the six-year statute of limitations under 28 U.S.C. §2401(a) to challenge final agency action under the APA does not begin to run until the plaintiff is injured and has a right to “file suit and obtain relief” will further facilitate such challenges.
For tax positions taken on previously filed returns on the basis of regulations that may be subject to challenge, taxpayers should consider refund claims or protective refund claims. For calendar year taxpayers filing on automatic extension, the deadline to file a refund claim for tax year 2020 is rapidly approaching. It should be noted that resolution of claims based on challenges to regulatory validity typically require commencement of litigation, since IRS Appeals will not consider validity challenges — no matter how well founded.14
Treasury and IRS will need to consider carefully guidance underway. For example, the Loper Bright decision casts significant doubt on Treasury’s and IRS’s ability (dubious even before the decision) to propose certain planned regulations aimed at so-called “related-party basis adjustment” transactions. See our prior coverage here. Any such regulations, if drafted as described in Notice 2024-54, will certainly be met with a challenge that they are beyond the limits of permissible rulemaking. The inability to issue sweeping regulations may also impact the current large partnership enforcement initiative — the poster child of the IRS’s ongoing enforcement campaign — and will lead to renewed attacks on the partnership anti-abuse regulation in particular.
1 Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842–843 (1984).
2 Id. at 843.
3 Loper Bright Enters. v. Raimondo, Nos. 22-451 and 22-129, slip op. at 35 (U.S. Jun. 28, 2024), available at https://www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf.
4 Id. at 22 (internal quotations omitted).
5 Id. at 23.
6 Id. at 25 (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)).
7 Id. at 23.
8 Id. at 34.
9 Justice Jackson did not participate in the consideration or the decision in Loper Bright, but did participate in the companion case, Relentless, Inc. v. Dep’t of Com., No. 22-1219.
10 Loper Bright Enters., slip op. at 3 (Kagan, J., dissenting).
11 Id. at 4.
12 Id. at 24 (internal quotations omitted).
13 No. 22–1008, slip op. at 6 (U.S. July 1, 2024), available at https://www.supremecourt.gov/opinions/23pdf/22-1008_1b82.pdf.
14 Prop. Treas. Reg. § 301.7803-2(c)(19) (removing from Appeals consideration “Any issue based on a taxpayer’s argument that a Treasury regulation is invalid unless there is an unreviewable decision from a Federal court invalidating the regulation as a whole or the provision in the regulation that the taxpayer is challenging.”)
