The Supreme Court recently issued two rulings addressing regulatory challenges: Loper Bright Enterprises v. Raimondo and Corner Post, Inc. v. Board of Governors of the Federal Reserve System. Although neither is a tax case, each is likely to have implications for future challenges to tax regulations. This alert provides a high-level summary of these decisions, in anticipation of a detailed discussion of the cases in a webinar hosted by Covington on July 18, 2024.
The Court granted certiorari in Loper Bright to address whether its decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc. should be overruled or clarified. Chevron established a standard of review for substantive challenges to the validity of agency regulations. Under that standard, a court would first determine whether a statute spoke directly to the issue or if Congress had left a gap to be filled by an agency. If a gap existed – in other words, if the statute was found to be ambiguous – then the court would next determine whether the agency’s regulation was a reasonable interpretation of the statute. If so, the court would be obligated to defer to the agency’s interpretation, even if the court would have read the statute differently.
In Loper Bright, the Supreme Court expressly overruled Chevron, holding that “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” First, the Court highlighted that statutory interpretation is and has long been the province of the judiciary. The Court explained that even during the administrative expansion of the New Deal era, Executive Branch statutory interpretations were afforded respect, but never superseded a court’s judgment. Instead, the weight of such interpretations depended on the factors that made them persuasive. See Skidmore v. Swift & Co.
The Court then discussed the Administrative Procedure Act (“APA”), 5 U.S.C. §551 et seq., enacted in 1946, noting in particular the APA’s requirement that courts, rather than agencies, decide “all relevant questions of law.” In the Court’s view, Chevron inappropriately required courts to ignore this mandate based on the “fiction” that Congress must have intended for agencies to resolve statutory ambiguities given those agencies’ subject matter expertise on the statutes they administer. The Court emphasized that courts, not agencies, have expertise on matters of statutory interpretation. Thus, the Court overruled Chevron on the ground that a court cannot be required to defer to an agency’s judgment regarding the construction and interpretation of a statute.
The Court’s ruling in Loper Bright is likely to encourage challenges to tax regulations, but the ultimate impact of the case is uncertain, as the contours of the new standard remain unclear in the tax context. The Loper Bright decision states that courts may not defer to agency interpretations “simply because a statute is ambiguous,” but deference to agency interpretations remains permissible if the interpretation is persuasive. Tax Court Judge Elizabeth A. Copeland, for example, has already expressed publicly her intention to continue to afford substantial weight to Treasury’s statutory interpretations. See Mary Katherine Browne & Nathan J. Richman, Supreme Court’s Overturning of Chevron Could Cause Tax Shake-Up, 184 Tax Notes Fed. (TA) 337, 38 (Jul. 8, 2024). Moreover, where a statute explicitly delegates authority to an agency, Loper Bright states that courts must respect that delegation, while also “ensuring that the agency acts within it.” Delegations of regulatory authority are quite common in the Internal Revenue Code, including both section-specific grants and the general grant of authority in Code section 7805(a) to “prescribe all needful rules and regulations for the enforcement of this title.” The ultimate impact of Loper Bright in the tax context will depend on how courts define the contours of their new role as interpreters of last resort for the Internal Revenue Code.
The Supreme Court’s decision in Corner Post confirms the prevailing view in the tax space that APA challenges to tax regulations must wait until a taxpayer suffers an injury. In Corner Post, the Court held that an APA claim “accrues” for purposes of the general six-year statute of limitations under 28 USC 2401(a) only when the plaintiff is injured by final agency action, not when the final rule is promulgated. The Court’s holding confirms the permissibility of challenges to older regulations, which had been unclear in non-tax spaces until Corner Post was decided.
Join Covington’s tax controversy experts – Sean Akins, Kevin Otero, Kandyce Jayasinghe, and Joe Sullivan – for a detailed discussion of these decisions and their implications for challenges to tax regulations on July 18, 2024 at 9:00 AM EST. We will explore practical steps that taxpayers may take following these decisions, including strategies for approaching IRS examinations, IRS Appeals proceedings, and litigation in a variety of forums.
If you have any questions concerning the material discussed in this client alert, please contact the members of our Tax practice.
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