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Special Counsel Mark Lubin Published in the PICPA CPA Now Blog
Recent Supreme Court Decisions Will Facilitate Challenges to Tax Guidance
In June 2024, the U.S. Supreme Court issued a decision that almost certainly will have a significant effect on tax planning and controversy practice. The court held that statutory interpretation is a judicial function and that courts may not defer to an agency’s interpretation merely because a statute is unclear. The ultimate impact of the decision is not yet clear, but much tax guidance now seems vulnerable to challenge.
Historically, under the “Chevron doctrine,” federal agencies were given deference in interpreting ambiguous provisions of federal statutes (including the Internal Revenue Code).1 Under Chevron, when addressing questions arising under federal statutes, courts first determined whether the statute was ambiguous; if so, courts were required to defer to a federal agency if it had adopted a permissible construction of the statute.
In June 2024, the U.S. Supreme Court issued a decision in Loper Bright Enterprises et al v. Raimondo2 that essentially overrules Chevron. Although Loper Bright did not concern a tax matter,3 it will almost certainly have a significant effect on tax planning and controversy practice.
The Supreme Court held that statutory interpretation is a judicial function and that courts may not defer to an agency’s interpretation merely because a statute is unclear. However, it mentioned that courts should consider agency interpretations and respect permissible delegations of authority by Congress. It also refrained from invalidating prior court decisions applying the Chevron doctrine.
Potential Impact
Loper Bright’s ultimate impact is unclear, but much tax guidance now seems vulnerable to challenge. Loper Bright has already been cited in invalidating one tax regulation,4 and other cases invoking Loper Bright are pending. The following discussion suggests considerations that may be useful in planning transactions and handling controversies until the law settles.5
Some regulations will clearly be more subject to challenge than others. I anticipate that Loper Bright is likely to have the following impact on regulations, at least generally:
- Regulations that merely restate or literally apply code language will probably be respected.
- Where code language is subject to multiple interpretations (or the code does not specifically address a particular issue), courts are likely to uphold regulations that are consistent with the reading of the code they consider most plausible, taking legislative history and “plain meaning” into account.
- Regulations that were promulgated to further policy objectives but are inconsistent with a literal reading of the code seem highly vulnerable to challenge.6
- Regulations that were issued under a specific delegation of congressional authority (such as the consolidated return regulations7) seem almost certain to be respected, provided the delegation is considered constitutional. Regulations issued under more general delegations (such as pursuant to code authorizations to issue regulations considered necessary or appropriate to avoid abuse of specific code provisions or otherwise further specified legislative purposes) seem likely to be respected, particularly if they plausibly interpret code language and are consistent with purposes expressed in legislative history. Regulations issued only under authority of code Section 7805 seem more likely to be vulnerable to challenge.8
Loper Bright will likely affect regulations concerning a broad range of federal tax issues that will become apparent over time. Examples of potentially vulnerable regulations that come to mind include the “partnership anti-abuse” regulations and recently issued guidance regarding related-party “basis shifting” transactions involving partnerships.9 Both of these (at least as I see it) target arrangements that under a literal reading of the code would achieve results that are inconsistent with government policy. Some might consider such guidance “taxpayer-unfavorable” and welcome the application of Loper Bright in that context.
However, much tax guidance is welcomed by taxpayers and practitioners because it provides certainty regarding the treatment of transactions and structures. Examples include the “check-the-box” (entity classification) regulations and regulations on continuation of partnerships and F reorganizations.10 Although such guidance is generally considered “taxpayer-favorable,” it may be vulnerable to challenge under Loper Bright by taxpayers whose circumstances cause them to be adversely affected.
Until it becomes clear how courts will apply Loper Bright, caution is advised when taking reporting positions contrary to existing guidance or implementing transactions based on such positions. The government is likely to defend its outstanding guidance, and taxpayers may need to litigate to invoke Loper Bright. Penalty exposure will likely continue to apply where positions contrary to regulations are not disclosed.11
Another recent Supreme Court decision, Corner Post Inc. v. Bd. of Governors of Fed. Rsrv. Sys.,12 is also likely to facilitate challenges to tax guidance. Although a discussion of Corner Post is beyond the scope of this blog, that decision holds that the six-year statutory limitations period for certain actions to invalidate governmental guidance under the Administrative Procedure Act13 commences when a particular claimant first suffers injury rather than when the governmental action that led to such injury (e.g., finalization of regulations) occurred. Because of that decision, taxpayers and their advisers should reconsider tax return reporting positions taken for open taxable years, keeping in mind potential opportunities to challenge guidance under Loper Bright.
1 See Chevron U.S.A. Inc. v. National Resources Defense Council Inc., 467 U.S. 837 (1984). “Code” references in this entry are to the Internal Revenue Code of 1986, as amended.
2 144 S.Ct. 2244 (2024).
3 Loper Bright considered the treatment of a rule issued by the National Marine Fisheries Service.
4 Varian Medical Systems Inc. and Subsidiaries v. Com’r. (163 TC No. 4, 2024). Varian concerned a regulation that disallowed benefits available under a literal reading of effective date provisions in the 2017 Tax Cuts and Jobs Act. It is unclear if the Tax Court would have reached the same result under Chevron, and it is possible that the government will appeal the Tax Court’s decision.
5 The discussion in this entry is relevant to various types of tax guidance (including IRS revenue rulings and notices), although Loper Bright could affect other types of guidance differently than regulations.
6 The Varian case cited in note 4 is a good example of where that might occur.
7 See Section 1502 and regulations issued thereunder.
8 Section 7805 generally authorizes all “needful rules and regulations” for the enforcement of the code.
9 Reg. Section 1.701-2; IRS Fact Sheet FS-2024-21 (June 17, 2024) and the pronouncements cited therein.
10 Reg. Section 301.7701-1 et seq.; Reg. Section 1.708-1; Reg. Section 1.368-2(m). Nonregulatory pronouncements regarding recissions and partnership profits interests also fall into this category. See Rev. Rul. 80-58, and Rev. Proc. 93-27, respectively.
11 See Reg. Section 1.6662-3.
12 144 S.Ct. 2440 (2024).
13 28 U.S.C. Section 2401(a).
This blog originally posted on the PICPA’s CPA Now blog in December 2024.