How Loper Bright Might Impact IRS Rulemaking

After the U.S. Supreme Court’s decision this year on agency deference, legal experts gave their predictions on how the IRS might approach rulemaking going forward — with the consensus that the change may not be as drastic as initially anticipated.

Tax practitioners and legal scholars spoke about the impacts of the Court’s June 2024 decision in Loper Bright Enterprises v. Raimondo (144 S.Ct. 2244 (2024)) during an October 31 panel presented by NYU Law’s Tax Law Center and the American Tax Policy Institute. Loper Bright overturned the decades-old Chevron doctrine that had called for deference to an agency’s interpretation when a statute is ambiguous.

Arvind Ravichandran, a partner at Cravath, Swaine & Moore LLP, said that despite Loper Bright, he thinks that “in a large number of cases, the results are going to be roughly similar.” He explained that in the Chevron case, itself, the Court “really look[s] at the legislative history” and “the agency action.”

Michigan Law Professor Nicholas Bagley, agreed, adding that for “the very large majority of rules” challenged in a post-Chevron world, “the question is just going to be, well, we’ve got this broad… delegated authority. Is the IRS acting… within it?” Bagley explained that “that’s the same question that courts asked under Chevron.”

In addition, “in a pre-Chevron world, interpretive rules were generally afforded less deference,” Bagley explained. And because such a large number of IRS rules are interpretive, “there’s a way in which the IRS has been operating in a Loper Bright regime for longer than other agencies and has been mostly doing just fine,” he said.

As far as legislative rules, Cornell Law Professor K. Sabeel Rahman said the Loper Bright decision doesn’t necessarily mean Treasury needs to change its approach “dramatically.” But Rahman cautioned that “I think we shouldn’t expect that the way it’s been is the way it will continue to be.”

IRS as expert.

One change we may see in IRS rulemaking going forward is the language, Ravichandran predicted. “The IRS needs to focus on what it is an expert in, and on demonstrating why its rule is consistent with that expertise.” And the IRS, as a tax administration expert, may be “quite different” from other agencies, he said. It has seen a lot of tax returns and many types of taxpayers and transactions — so it is “able to demonstrate that expertise.”

Ravichandran also suggested that the IRS may be more “deliberate” post-Loper Bright — including “looking at the statute and identifying why there’s a problem,” explaining its choice of a particular solution, and recognizing that the solution “has costs.” And it’s “very advisable” for the IRS to include those details in the Notice of Proposed Rulemaking, and in the Treasury Decision “to the extent necessary.”

Addressing comments.

The panelists disagreed, however, on how the IRS should and will engage with commenters going forward. Ravichandran predicted “much more engagement with commenters.” He referenced another Supreme Court decision from this year, Ohio vs. EPA (144 S.Ct. 2040 (2024)), in which he said the Court made it “clear” that “you can’t just acknowledge comments. You have to engage with [commenters].”

However, Lily Batchelder, a professor at NYU Law and former Treasury Assistant Secretary of Tax Policy, countered, “how do you reasonably engage when there’s tens of thousands of comments?” She noted that for the recent digital asset information reporting regulations, the IRS received over 40,000 comments. How much agency time would it take and how much “sand in the gears” does that create to respond all those comments, she asked.

Potential for uncertainty.

Batchelder also noted the “potentially really large” costs of additional litigation and taxpayer uncertainty following Loper Bright. “The law may vary more wildly in tax than has been the case historically,” she said. And that poses several potential problems: IRS spending on litigation as compared to overall receipts, “people’s trust that the tax system is administered fairly,” economic impacts of an uncertain tax system, and impacts on “social supports” for things like health and retirement.

Ravichandran predicted that the hard cases will be those where the question of whether there has been a delegation and whether the IRS is acting within that delegation “start to merge.” But he noted that issue has already been previewed in City of Arlington, Texas v. FCC (569 U.S. 290 (2013)) — in that case, the Supreme Court considered whether an agency’s interpretation of a statutory delegation of authority was eligible for Chevron deference. Justice Antonin Scalia “persuasively, in my mind, argued that there’s really no difference between that question and any other question about agency power,” Ravichandran explained.

But in terms of how courts will analyze agency rulemakings, Batchelder said “I don’t think the Loper Bright case implies that we’re moving to a literalist approach.” Even textualists like Scalia “have emphasized that the search for best meaning involves understanding the context and purpose of the Code.” She was, however, fearful that a few lower courts might adopt “literalist interpretations” that are problematic because they don’t account for the Tax Code’s interconnectedness.

Batchelder contended that “it’s especially important for members of the profession, including folks in private practice, to talk about how destabilizing” uncertainty could be. She hoped “the mood in general will shift to recognize how important stability in the tax law is and actually having guidance on it.”