Tax Pros Discuss Impact of Loper Bright on IRS Regs

The Supreme Court’s decision in Loper Bright Enterprises v. Raimondo that overturned the long-standing Chevron doctrine’s deference to government agencies’ statutory interpretations may have ripple effects on Treasury and IRS rulemaking, though to what extent remains unclear, tax professionals say.

On July 23, the American Bar Association Tax Section held a webinar that explored the possible ramifications of Loper Bright on tax guidance. Moderator Kavya Rajasekar was joined by fellow Latham & Watkins colleague and panelist Eric J. Konopka alongside Michael J. Desmond of Gibson Dunn & Crutcher LLP, Carina Federico of Crowell & Moring LLP, and David Foster of Kirkland & Ellis LLP.

Agency expertise.

As summarized by Foster, the Court in Loper Bright‘s 6-3 majority opinion found that Chevron “is based on a fiction” or a “myth” that government agencies have the expertise to interpret statutes. To the majority, “it has always been the Judiciary’s duty to say what the law is and Chevron gets in the way of that,” so the 40-year-old doctrine was cast aside.

Courts, the opinion reasoned, must “independently construe the statutes,” Foster explained. The Court said “statutes, no matter how impenetrable,” must and do “have a single best meaning,” he continued. “[W]hen it comes to impenetrability, nothing rivals the Internal Revenue Code.”

Desmond added that before Loper Bright, a “reasonable interpretation” would be enough for a court to defer to agency action. He said “there are very few cases where courts” lay out multiple different interpretations of a statute and deems one to be better than another while still deferring to an agency despite disagreement.

“[C]ertainly from the IRS and Treasury Department’s perspective, they always think that their interpretation is the best interpretation of the statute,” Desmond continued. “So in their mind, it’s not going to change things. They’re going to go out with regulations that interpret statutes. The Treasury Department doesn’t come out in a preamble and say, ‘There are five different choices here — we’re choosing one that we like even though we know it’s not the best interpretation.'”

Foster questioned how the IRS would be able to claim expertise on the “breathtakingly broad swath of American life” that the Code regulates. From religious institutions to housing policy to environmental science, “it’s sort of impossible for me to understand how anyone could be an expert on all of those topics,” said Foster. He clarified there are certainly “core” areas of tax where the IRS “is absolutely” an expert, but he expects where that line is drawn will be an area “where we’re going to see a lot of fighting” akin to debates around the IRS’ knowledge of healthcare policy during Obamacare litigation.

Desmond thinks the IRS will continue its usual rulemaking process by issuing proposed regulations and inviting stakeholder comments to fill in the gaps in areas where it “does not have historical expertise.” The IRS needs comments and recommendations from industries, taxpayers, and other agencies regardless of deference, said Desmond. “It can’t just do that in a vacuum and post FAQs to its website and be done with it.” Although the IRS “really does genuinely try to get to the right answer” in its interpretations, the Administrative Procedure Act notice-and-comment period will continue without Chevron, he emphasized.

Delegation.

Konopka explained that “there’s still room for Congress to delegate to agencies expressly, and that can come in a variety of forms.” For example, Congress can expressly instruct Treasury to define a statutory term. When such regulations are promulgated pursuant to express delegation, courts review those regulations “a little bit differently,” he continued. Primarily, the court considers if the regulation is “rational,” if the agency considered “all the relevant factors in the statute,” and if the regulation is “within the bounds of the authority that was delegated by Congress.”

Express delegation differs from general delegation of authority under Code Sec. 7805. Konopka foresees there being “a lot of controversy, particularly in areas like tax,” in how much deference courts will give expressly delegated regulations compared to generally delegated regs post-Chevron. He expects Congress “will start delegating even more and do it expressly to make sure that it’s clear enough to courts that it actually does intend for agencies to have a sphere of policy-making authority that courts should respect.”

However, there are constitutional limits on the extent to which Congress can do so. As Foster said, it would be problematic if Congress were to punt to the Treasury secretary the authority to set income tax rates. Desmond agreed, though, that “the playing field is going to shift” towards a debate whether particular regulations are “outside the bounds of those express grants of authority.”

Alternative deference standards.

As Federico pointed out, there are other deference standards courts can still consider, such as the standard from Skidmore v. Swift. Despite being “definitely a weaker test than the Chevron test,” the Skidmore standard gives “some weight and persuasiveness” to an agency’s interpretation, she said.

First, Skidmore considers “how formal the guidance at issue is.” For the IRS, a finalized reg would be more persuasive than unreliable guidance like a notice or FAQ under this standard. Next, Skidmore also factors in timing. A regulation promulgated shortly after legislation is enacted holds more sway than guidance issued years after enactment. Finally, Skidmore favors expertise. Federico expects certain courts, perhaps at the district level, to still defer to IRS interpretation for complicated tax issues. However, she would not expect the Tax Court to use Skidmore as much.

There is also the Auer doctrine, which provides that courts can defer to an agency’s interpretation of its own ambiguous regulations. For deference under Auer to apply, as the Supreme Court said in Kisor v. Wilkie, the regulation must be “genuinely ambiguous after exhausting all tools of interpretation.” Among other requirements, the agency’s interpretation must be “reasonable.”

According to Federico, Auer is “far” narrower than Skidmore and the IRS may not reference it directly when defending against regulatory challenges in court. The IRS will likely argue that “they’ve carefully considered the issue” and reached their position “based on their judgment.”

While some practitioners may be tempted to advise some clients to take tax positions counter to IRS regs in light of Loper Bright and challenge their validity or the agency’s statutory interpretation, the panel agreed many taxpayers would prefer to not go to court if it can be avoided.

“At least for those taxpayers, they should be able to rely on IRS regulations and guidance while they stay within the agency,” said Konopka. “Maybe it doesn’t always work out that way, but obviously regulations and other guidance” will have an effect “on anybody who doesn’t want to go into court and actually challenge it or try to get a different view of what the law means, other than what the IRS says it means.”

Foster said even if an advisor is confident that the IRS’ interpretation is wrong, going as far as filing a Form 8275-R, Regulation Disclosure Statement, may give taxpayers some pause and “swallow hard.” He ventured it would be a “fairly large audit flag” to attach a document on their return that says, “Sorry, IRS, your regulations are invalid.”

Desmond commented that there may be more preemptive regulatory challenges before a taxpayer is assessed penalties, but many would rather have the “certainty of a regulation they don’t like versus the uncertainty of a potentially suspect regulation that’s going to require … many years” of litigation.

For more on the Chevron doctrine, see Checkpoint’s Federal Tax Coordinator ¶ T-10101.