On November 5, 2024, Judge Goeke of the United States Tax Court issued an order granting the petitioners’ Motion for Reconsideration of Findings (Motion) in Schwarz v. Commissioner. On May 13, 2024, the Tax Court released Judge Goeke’s initial opinion in Schwarz. Then, on June 28, 2024, the Supreme Court decided Loper Bright Enterprises v. Raimondo, which overturned the rule in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., regarding deference to agency regulations that construe ambiguous statutory language. The petitioners in Schwarz filed the Motion, arguing Loper Bright was an intervening change in law that merited reconsideration of the Tax Court’s earlier opinion.
The issue in Schwarz related to the hobby loss rules of section 183 of the Internal Revenue Code, as amended in 1986 (Code). For several years, the petitioners operated a farm and hunting lodge in Texas at significant loss. The petitioners claimed the losses for US federal income tax purposes, which losses the Internal Revenue Service (Service) in turn disallowed. The Tax Court originally ruled for the Service and held that the petitioners did not operate the farm or the hunting lodge with an intent to make a profit. In making this determination, the Tax Court relied on Treas. Reg. §§ 1.183-1(d)(1) and 1.183-2(b).
The Tax Court’s initial opinion in Schwarz did not cite Chevron. Indeed, the validity of the subject Treasury regulations was not challenged at the trial. In response to the Motion, the Service argued that “Chevron is not controlling or even relevant law in this case,” because petitioners had not challenged the validity of the subject Treasury regulations, and that petitioners “forfeited th[e] opportunity [to challenge regulations] when they failed to raise these challenges at trial or on brief.” In his Order granting petitioners’ Motion, Judge Goeke referenced another recent Tax Court case, YA Global Inves. v. Commissioner, in which the petitioner also argued that Loper Bright represented a change in controlling law and filed a similar motion for reconsideration. The court, citing the order in YA Global, explained that although the prior opinion did not cite Chevron, that “does not mean that Chevron was not implicit controlling law.”
Further referencing YA Global, Judge Goeke noted a distinction between the cases. In YA Global, the court denied petitioner’s motion for reconsideration, noting that petitioner’s argument in the case was circular, and stating that the court “do[es] not need help from the Treasury Department to judge tautological arguments as unavailing,” while the decision in Schwarz was in part reliant on the subject regulations.
The Order calls for both parties to file responses addressing the validity of the subject Treasury regulations, and delineates the items to be addressed in those responses, including Congress’ delegation of authority to the Treasury Department to promulgate regulations under section 183. The Order also requests that the parties address the Tax Court’s decision in Strode v. Commissioner, which held Treas. Reg. § 1.183-2(b) to be valid, noting that the factors in the regulation were derived from caselaw, and whether the Tax Court should consider those same factors if the subject regulations were held to be invalid.
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