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Special Counsel Mark Lubin Published in The Legal Intelligencer
Background
This article discusses the potential impact of two recent U.S. Supreme Court decisions – Loper Bright Enterprises, Inc., et al v. Raimondo, 144 S.Ct. 2244 (2024), and Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 144 S.Ct. 2440 (2024) – on tax planning and controversy practice.
In Loper Bright, the court overruled the long-standing “Chevron doctrine,” which required courts to grant deference to federal agencies in interpreting statutory provisions that were considered silent or ambiguous. In overruling Chevron (467 U.S. 837), the court emphasized that courts (and not administrative agencies) have a “special competence” to resolve statutory ambiguities and stated that courts “need not and . . . may not defer to an agency interpretation of the law simply because a statute is ambiguous.” However, it further stated that executive branch judgment may inform that inquiry, and that agency action consistent with constitutionally valid delegations of authority must be respected. It also stopped short of invalidating prior judicial decisions that applied the Chevron doctrine.
In Corner Post, the Court considered application of the “default” statute of limitations for actions against the United States, including challenges to federal regulations under the Administrative Procedure Act (28 U.S.C. §2401(a)). Under that statute, such actions must be commenced within six years after the right of action first “accrues.” Corner Post considered whether the limitations period commenced when the relevant regulations were finalized or when the affected plaintiff first sustained injury thereunder. (The plaintiff in Corner Post had commenced business more than six years after the regulation at issue was finalized, so its action would have been barred under the former approach.) The court ruled that in the matter before it limitations period commenced when the plaintiff first suffered injury.
The impact of Loper Bright and Corner Post will become clearer over time as cases applying those precedents work their way through the courts. Actions have already been filed in response to those decisions, and more will likely follow soon. However, taxpayers and counsel planning transactions or defending existing controversies rarely have the luxury of waiting until law settles. Considerations that may be helpful in the meantime are discussed below.
Important Factors
Two factors that seem likely to significantly affect Loper Bright’s impact on existing and future tax regulations (and potentially other tax guidance) are the extent to which (1) they are specifically supported by a delegation of authority under the Internal Revenue Code (the code) and (2) the extent to which their interpretation is considered required or permitted under code language. The latter factor will likely depend on the extent to which plausible alternative interpretations exist.
Authority Delegation
Regulations prescribed under specific grants of authority in the code will likely remain difficult to challenge. For example, Code §1502 broadly authorizes the regulation of corporations that file consolidated federal income tax returns, including through promulgation of rules differing from code provisions that would otherwise apply. The prospect of Loper Bright being applied to invalidate such regulations seems doubtful.
Regulations issued under less comprehensive delegations – such as code provisions authorizing regulations considered necessary or appropriate to avoid abuse or otherwise further their purposes – may be somewhat more vulnerable, but courts will likely be reluctant to invalidate regulations that are consistent with both a literal reading of the code and clearly specified legislative objectives.
Code §7805 authorizes promulgation of “all needful rules and regulations for the enforcement of [the code] ....” Regulations based solely on such authority will likely enjoy less protection than those supported by specific delegations. Thus, absent direct legislative history support, courts may be open to invalidating such regulations, particularly where they are inconsistent with one or more potential literal readings of the code.
Potential Alternative Interpretations
Regulations that merely reiterate code provisions seem unlikely to be affected by Loper Bright. Similarly, regulation examples that merely apply code provisions, particularly where no contrary literal interpretations are plausible, will probably be respected.
Regulations that are at least arguably inconsistent with some plausible reading of the code may be vulnerable to challenge. However, the presence of some or all of the following factors will probably decrease the likelihood of invalidation: (1) consistency with a potential reading of the code found to be most plausible, (2) consistency with results described specifically in legislative history and (3) descriptions (e.g., in preambles) tying the prescribed rules to stated legislative purposes.
Regulations implementing IRS or Treasury policy views (including by filling legislative “gaps”) that depart from a literal application of the code seem particularly vulnerable. For example, in Varian Medical Systems, Inc. and Subsidiaries v. Commissioner (163 T.C. No. 4, 2024), the U.S. Tax Court cited Loper Bright in invalidating regulations that would have disallowed benefits from an effective date gap in the 2017 Tax Cuts and Jobs Act. A variety of other regulations may be subject to similar treatment.
Practice Considerations
It isn’t yet clear how courts will apply Loper Bright over time. Taxpayers and advisers contemplating transactions based on positions contrary to government pronouncements should always proceed cautiously. While Loper Bright may affect risk assessment for such transactions, the government can be expected to defend its existing guidance. Moreover, nondisclosed reporting positions contrary to regulations are subject to penalty exposure.
Loper Bright is unlikely to have a material impact at the IRS audit level and, despite the “hazards of litigation” standard generally considered by IRS Appeals in settlement discussions, it seems unlikely that Appeals will entertain arguments that regulations are invalid before a court tells it so. Thus, taxpayers taking positions that depend on invoking Loper Bright should anticipate having to litigate.
Corner Post will offer some taxpayers a longer period for challenging the validity of tax guidance. Taxpayers who took reporting positions in open taxable years based on regulations or other guidance that might now be challenged under Loper Bright should consider filing amended tax returns, remaining mindful that the six-year limitations period mentioned above likely commenced when guidance first causes any incremental liability.
Mark Lubin is a special counsel at Chamberlain Hrdlicka. Also a CPA, he practices tax law and has extensive experience in mergers and acquisitions, international tax, joint ventures, restructurings, alternative investment vehicles and other areas of taxation. He can be reached at mlubin@chamberlainlaw.com.
Reprinted with permission from the October 23, 2024, edition of The Legal Intelligencer © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.