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The Supreme Court is reshaping the role of the administrative state in the federal government. Last term, in Loper Bright Enterprises v. Raimondo, the Court abandoned what is commonly referred to as Chevron deference, after the 1984 Supreme Court case adopting the rule, whereby courts deferred to an agency’s interpretation of an ambiguous statute that the agency is charged with administering. In Corner Post, Inc. v. Board of Governors of the Federal Reserve System, the Court held that the six-year statute of limitations applicable to a facial challenge to a regulation begins to run when the plaintiff is harmed, not when the agency rule is promulgated, allowing facial challenges of long-established rules. Still further, in Securities and Exchange Commission v. Jarkesy, the Court held that imposing a securities fraud penalty at the administrative level violates the Seventh Amendment right to a jury trial, limiting agencies’ enforcement authority. This term, in Federal Communications Commissioner v. Consumer Research, the Court is poised to revive the nondelegation doctrine, which has been dormant for about a century and provides that Congress may not delegate legislative power to an agency. There’s a lot to chew on, and as I remind my kids, small bites. In this post, I address the impact of Loper Bright on tax administration, including where we may be headed and initial feedback from lower courts.

To set the stage, let’s recap Loper Bright. Chevron laid out a two-step approach to determining whether deference is owed to a regulation or other agency action intended to have the force and effect of law. The first step was to discern “whether Congress has directly spoken to the precise question at issue.” If the statute is silent or ambiguous, courts proceeded to step two which asked whether the agency offered “a permissible construction of the statute” in exercise of Congress’s explicit or implicit delegation of authority to fill statutory gaps. Chief Justice Roberts, writing for the majority in Loper Bright, criticized Chevron deference as an abdication of the constitutional responsibility and expertise of courts to interpret the laws. “[N]o matter how impenetrable,” statutes “have a single, best meaning” that Chief Justice Roberts insisted is the job of courts to determine. Courts must pay respectful consideration to agency interpretations, but that does not mean treating agency interpretations as controlling. Justice Kagan, in dissent, denied that Chevron deference displaces the role of courts to determine what the law is, pointing out that courts bring their full interpretive power to bear under Chevron step one. The issue, rather, is “[w]ho should give content to a statute when Congress’s instructions run out?” Justice Kagan called the majority’s answer, empowering courts to decide a broad array of technical and policy issues, “judicial hubris.”

Note the common ground between Chief Justice Roberts and Justice Kagan. They agree that courts interpret the law and are the arbiters of whether a statute is ambiguous. They further agree that the agencies offer invaluable guidance based on their experience and expertise. Where they part ways is whether the authority to resolve statutory ambiguities ultimately rests with agencies or courts. Loper Bright puts an end to the discretion afforded agencies to apply reasonable interpretations of statutes and mandates that courts apply the best interpretations.

There is no question that challenges to Treasury Regulations in general stand a better chance under Loper Bright and that such challenges will increase. But how much of a difference Loper Bright will make is an open question, and there are reasons to think that the impact won’t be earthshattering.

First, Chevron deference had been falling out of favor for a long time. As Chief Justice Roberts noted in Loper Bright, the Supreme Court last deferred to an agency interpretation under Chevron in 2016. The Supreme Court tended to ignore Chevron. Lower courts were still dutybound to apply Chevron but did so to less deferential effect. For example, Judge Raymond Kethledge wrote in 2017 that he never had occasion to defer to an agency’s interpretation of a statute in his nearly ten years on the bench because he never found the underlying statute ambiguous. Judge Kethledge’s statute-centric approach is now the norm, and Treasury has known this was coming.

Second, Treasury has gotten better at justifying its regulations. For a long time, Treasury was not subject to the same rules that applied to other agencies, and specifically the State Farm requirement, named after the 1983 Supreme Court case, that the agency “articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choice made.” The end of that era forced Treasury to better explain its reasoning and respond to public comments, which probably contributed to better regulations. That will help now that courts must be persuaded that a Treasury Regulation reflects the best interpretation of a statute.

Third, courts tend to be wary of unintended consequences of their decisions, particularly when it comes to taxes. The rules are devilishly complicated and interconnected, and there are over 200 million returns filed annually that are potentially affected. It is easy to see how a court might hesitate to substitute its own interpretation for that of Treasury when the best interpretation of a statute is genuinely in doubt.

Initial decisions reviewing Treasury Regulations under Loper Bright don’t tell us much about how assertive courts will be in shaping the rules. The Tax Court applied Loper Bright for the first time in Varian Medical Systems, Inc. v. Commissioner, a decision reviewed by the full court, addressing a regulation that synchronized the timing of changes enacted by the Tax Cuts and Jobs Act to prevent both a deduction and a credit based on income of foreign subsidiaries. The Tax Court invalidated the regulation because the effective date of the statute “could hardly have been clearer.” Thus, even under Chevron, the regulation was not passing muster. The D.C. Circuit, in Lissack v. Commissioner, went the other way and upheld a whistleblower regulation. But like Varian, the result follows from a straightforward reading of the statute. The D.C. Circuit issued two opinions in Lissack, the first one applying Chevron and the second on remand from the Supreme Court following Loper Bright. And to be sure, the D.C. Circuit concluded in its first opinion that the statute was not unambiguous and that Treasury’s interpretation was reasonable. But the reasoning in both opinions was largely the same – what made Treasury’s interpretation reasonable (under Chevron) also made it the best (under Loper Bright).

Let’s see how courts handle Treasury Regulations where the statute is less of a guide. Among the most complex regulatory schemes, such as the transfer pricing rules and consolidated return rules, are offspring of the most meager of statutes. Those types of challenges are pending.

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