Supreme Court overruling of Chevron v. NRDC expected to strengthen challenges to tax regulations

In 1984, the Supreme Court held in Chevron v. NRDC that federal courts should defer to an agency’s interpretation of a statute if (1) the statute was ambiguous or silent, and (2) the agency’s interpretation was a permissible, even if not the best, construction of the statute.[1] Later, the Court explained that Chevron’s holding was based upon a “presumption” that Congress intended ambiguous statutes to “first and foremost” be resolved by the relevant agency.[2]

In a June 28 opinion written by Chief Justice Roberts in Loper Bright Enterprises v. Raimondo,[3] the Court squarely overruled Chevron. The underlying dispute was between herring fishermen in the Atlantic Ocean and the National Maritime Fisheries Service (the NMFS). In the face of statutory silence on the matter, the NMFS had promulgated rules requiring the fishermen to pay for federal observers on their boats, and lower courts had sustained the rules on the basis of Chevron deference.[4]

Chief Justice Roberts explained that, as stated in Marbury v. Madison,[5] it has always been “emphatically the province and duty of the judicial department to say what the law is.”[6] Although courts owed “respect” to executive-branch interpretations of a statute, a court’s judgment of the statute’s meaning should nevertheless be “independent.”[7] The Court explained that the 1946 enactment of the Administrative Procedure Act (the APA), which requires a federal court to “decide all relevant questions of law,”[8] merely “codifie[d]” the “unremarkable, yet elemental position … that courts decide legal questions by applying their own judgment.”[9] The APA did not displace that foundational understanding of a court’s role in statutory interpretation.

The Court thus overruled Chevron on the ground that its core holding—deference to agency interpretations of federal statutes—conflicts with the foundational understanding of the judicial role as codified in the APA.[10]

Justice Thomas wrote a short concurrence to note that Chevron conflicted not only with the APA but with the separation of powers.[11] Justice Gorsuch also concurred, emphasizing that the “proper application of the doctrine of stare decisis” weighed in favor of overruling Chevron.[12] Justice Kagan (joined by Justices Sotomayor and Jackson) dissented on the ground that Chevron was based on a valid presumption about Congressional intent, that it did not conflict with the APA, and that stare decisis counseled leaving its framework in place.[13]

Tax takeaways

The Court’s ruling is likely to embolden challengers in efforts to invalidate regulations and will surely open new avenues of attack. But Treasury will continue to have defenses against those attacks based on judicial doctrines giving general respect to agency interpretations and, based on the scope of a particular statutory delegation, the degree of discretion granted to it, so the effect of Loper Bright is hard to predict. Also, there will be no immediate change to administrative appeals, where arguments of invalidity cannot be heard under current policy, and Treasury may adjust its approach to rulemaking, as it has done over the past decade, elevating the importance of taxpayers submitting comment letters on notices and proposed regulations.

1. Challengers to Treasury regulations likely to be emboldened

Loper Bright continues a trend of applying general administrative law to Treasury regulations that began in 2011 with Mayo Foundation, where the Court extended the application of Chevron deference to tax cases, as sought by Treasury. In Mayo Foundation, the Court stated that it was “not inclined to carve out an approach to administrative review good for tax law only.”[14]

Armed with Chevron deference, Treasury and the IRS arguably took a more aggressive posture in promulgating Treasury regulations. Simultaneously, Mayo Foundation opened the door to challenges to Treasury regulations under the APA and related administrative law standards,[15] and nothing in Loper Bright suggests that door is closing.

Indeed, the court in the FedEx case in the Western District of Tennessee, which invalidated Treasury regulation section 1.965-5(c)(1)(ii), which denies foreign tax credits with respect to so-called offset earnings, has already ordered the parties to submit supplemental briefing explaining if and how Loper Bright affects their arguments.[16] The lack of Chevron deference is also likely to be a consideration in numerous areas of tax litigation, including, among others, those involving regulations promulgated under the Inflation Reduction Act and the Tax Cuts and Jobs Act.

The overruling of Chevron can only increase the already elevated number of cases challenging the validity of regulations since the Court’s ruling in Mayo Foundation, though the full effect of the demise of Chevron deference is hard to predict.

2. But Treasury regulations will continue to be given respect and possibly even controlling discretion depending on the particular statutory delegation

The Court in Loper Bright recognized the continued vitality of the Skidmore standard after the demise of Chevron.[17] In Skidmore v. Swift, a case involving a Department of Labor bulletin, the Court observed that rulings like the bulletin are not binding on the court but should be given a degree of respect.[18] The Court stated that some respect should be given to policies made in pursuance of official duty, based on more specialized experience and broader investigations and information than is likely to come to a judge in a specific case. The respect in a given case “will depend on the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking control.”[19]

The Court in Loper Bright also recognized that special considerations apply to agency regulations, like certain Treasury regulations, that are expressly authorized by a statute. Although federal courts must now interpret statutes without giving special weight to an agency’s interpretations reflected in regulations,[20] many statutes expressly delegate to agencies the authority to define terms or fill gaps, or to regulate subject to the limits imposed by a term or phrase, such as “appropriate” or “reasonable,” that leaves the agency with “a degree of discretion.”[21] The Court clarified that when considering such an express delegation of authority, a court’s role has been, even before Loper Bright, to keep an agency’s action within constitutional (non-delegation) and statutory boundaries and to confirm that the action reflects “reasoned decisionmaking” within those boundaries.[22] The Internal Revenue Code gives Treasury general authority to “prescribe all needful rules and regulations for the enforcement of this title,”[23] and many provisions of the Internal Revenue Code expressly give Treasury authority to promulgate regulations. Accordingly, such Treasury regulations may be sustained if they are promulgated in accordance with the procedures of the APA, are substantively within constitutional and statutory boundaries, and reflect reasoned decision making.

3. No immediate change in administrative appeals and some potential change in Treasury’s approach to promulgating regulations

Loper Bright may have limited effect at the administrative appeals level. In 2022, the IRS Independent Office of Appeals—an administrative office charged with resolving tax disputes with an eye to litigation risk—adopted a rule according to which it generally will not consider arguments that a regulation is invalid.[24] Unless that policy changes, most challenges to Treasury regulations under Loper Bright will be limited to the courthouse.

Loper Bright may also affect Treasury’s approach to issuing Treasury regulations, at least at the margin. Since the government’s loss of several cases based on APA notice-and-comment challenges, Treasury has attempted to take a more comprehensive approach in responding to taxpayer comments on proposed regulations.  Although this is reflected in more voluminous preambles to newly promulgated Treasury regulations, in many cases, Treasury takes a perfunctory approach in responding to individual comments, without establishing that its interpretation is the best reading of the statute or at least reflects reasoned decision making. In response to Loper Bright, we may see more reasoned responses to comments. The burden of producing such responses could slow the promulgation of regulatory guidance and lead to greater uncertainty for taxpayers. Treasury may also be more cautious in adopting changes to long-standing regulations or policies, given the importance a regulation’s pedigree has to its ability to persuade and the extent to which a court might conclude that the long-standing interpretation is the better one. It’s possible that the effect of Loper Bright on regulatory process will not be clear until after there are court rulings on the effect of the new standard on the validity of Treasury regulations.

For further information on how recent Supreme Court decisions are rebalancing power in the administrative state, see Davis Polk’s July 12, 2024 client update.

[2] Smiley v. Citibank (South Dakota) N.A., 517 U.S. 735, 740-41 (1996).

[3] 603 U.S. __ (2024) (No. 22-451), together with Relentless, Inc. v. Dep’t of Commerce, No. 22-1219).

[4] Id., slip op. at 7-8.

[5] Marbury v. Madison, 1 Cranch 137 (1803).

[6] Loper Bright, slip op. at 9 (quoting Decatur v. Paulding, 14 Pet. 497, 515 (1840)).

[7] Id.

[8] 5 U.S.C. § 706.

[9] Loper Bright, slip op. at 14.

[10] Id. at 16.

[11] Loper Bright (Thomas, J., concurring), slip op. at 1-4.

[12] Loper Bright (Gorsuch, J., concurring), slip op. at 1-34.

[13] Loper Bright (Kagan, J., dissenting), slip op. at 1-33.

[14] Mayo Foundation for Medical Educ. & Research v. United States, 562 U.S. 44, 55 (2011).

[15] See, e.g., United States v. Home Concrete Supply, LLC et al., 566 US 478 (2012); Hewitt v. Comm’r, 21 F.4th 1336 (11^th Cir. 2021); Good Fortune Shipping SA v. Comm’r, 897 F.3d 256 (D.C. Dir. 2018); Green Valley Investors LLC v. Comm’r, 159 T.C. 80 (2022).

[16] Order dated July 1, 2024, FedEx Corporation v. United States, No. 2:20-cv-02794-SHM-tmp, ECF No. 63 (W.D. Tenn).

[17] See, e.g., Loper Bright, slip op. at 17; see also Loper Bright (Gorsuch, J., concurring), slip op. at 17.

[18] Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).

[19] Id.

[20] Loper Bright, slip op. at 35.

[23] I.R.C. 7805(a).

[24] See I.R.M. 8.1.1.3.1; see also Prop. Treas. Reg. § 301.7803-2(c)(1).