The Loper Bright decision reverses the longstanding legal framework for evaluating an executive agency’s regulatory interpretation of a statute it administers. Pursuant to the Court’s 1984 decision in Chevron, courts were instructed to defer to the agency’s interpretation, so long as the statute was ambiguous and the agency’s interpretation was reasonable [Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)]. The Chevron deference thus gave agencies the ability to interpret ambiguous laws and fill statutory gaps without interference from the courts—unless the interpretation was found to be unreasonable.
In Loper Bright, the petitioners challenged a regulation issued by the National Marine Fisheries Service (NMFS) requiring certain fishing boats to pay fees to support data collection efforts regarding the management of the fisheries. The lower courts upheld the regulation as a reasonable interpretation of an ambiguous statute under Chevron. The Supreme Court concluded that Chevron deference “cannot be reconciled with the [Administrative Procedure Act (APA)]” and remanded the decisions for the lower courts to exercise their own independent judgement to determine whether the fee was warranted by the law. The Court noted, however, that cases in which a statute clearly delegates rulemaking authority to an executive agency, courts should continue to apply deferential treatment to the agency’s interpretation.
After Loper Bright, the Court issued a second opinion related to the APA in Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., a dispute having to do with fees for debit-card usage set by payment networks such as Visa [144 S. Ct. 2440 (2024)]. That case raised the question of when a plaintiff’s cause of action under the APA accrues for purposes of the six-year statute of limitations for bringing a civil case against the United States [see 28 USC section 2401(a)]. The defendant in Corner Post, the Federal Reserve Board, argued that the six-year statute of limitations to challenge the fee-setting regulation began to run on the date the regulation became final, and that the petitioner’s claim was therefore time-barred. The petitioner argued that the challenge was not time-barred because the statute of limitations did not begin running until the petitioner was actually injured by the regulation. The Court sided with the petitioner, holding that “an APA claim does not accrue for purposes of §2401(a)’s 6-year statute of limitations until the plaintiff is injured by final agency action.”
Impact on Tax Law
Loper Bright and Corner Post are significant decisions that lay the groundwork for a more plaintiff-friendly litigation landscape in challenging agency actions. In undoing Chevron, the Supreme Court has turned agency regulations not based on an explicit grant of authority from affirmative law to an expression of an agency’s position on a statute. This is particularly impactful in the tax space, where Treasury Regulations are not usually based on specific delegations of authority and more often serve the role of filling gaps or clarifying ambiguities in the Internal Revenue Code. Meanwhile, Corner Post affirms that taxpayers may continue to bring challenges to established regulations so long as they sue within six years of their individual injury, leaving the door open for repeated challenges to the same regulation in different forums and for challenges to regulations that have been in effect for many years.
Near-Term Challenges
In the aftermath of Loper Bright, taxpayers evaluating whether to challenge a regulation should first determine whether the statute contains an express grant of authority. Courts will continue to defer to Treasury’s interpretations in regulations promulgated under those sections. For example, the IRC section 863(a) rules for sourcing income between the United States and other jurisdictions provides: “Items of gross income, expenses, losses, and deductions … shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary.” Because of the express grant of authority, courts should continue to give deference to the sourcing rules of Treasury Regulations section 1.863-1 and will only overturn those regulations if they are unreasonable.
To the extent Loper Bright can be interpreted as a signal toward less deference to agencies in general, sub-regulatory guidance, such as IRS Notices, Revenue Procedures, and Revenue Rulings, are likely more vulnerable as well.
By contrast, legal challenges are more likely to be successful in cases where there is no express grant of authority and regulations merely fill gaps or interpret ambiguities in a statute. For example, IRC section 78 regarding grossing up income for deemed paid foreign taxes is short, simple, and nowhere mentions regulations to be promulgated by the Secretary. The existing regulation, Treasury Regulations section 1.78-1, has already been subject to taxpayer challenge as being contrary to the statute, and some tax professionals are speculating that additional lawsuits are likely to be filed, and likelier to succeed, in the absence of Chevron deference to shield the regulation (Pricewaterhouse-Coopers, “Potential Tax Implications of the U.S. Supreme Court Overruling the Chevron Doctrine,” July 2024, https://tinyurl.com/3ttbz6ca).
To the extent Loper Bright can be interpreted as a signal toward less deference to agencies in general, sub-regulatory guidance, such as IRS Notices, Revenue Procedures, and Revenue Rulings, are likely more vulnerable as well. While IRS interpretations not adopted as final rules have not received formal Chevron deference from the courts, they are often treated as persuasive authority. Many important IRS programs are administered based on sub-regulatory guidance, and the IRS could find those programs under increasing scrutiny as the guidance is given even less weight. For example, the IRS tightened its review of Employee Retention Credits (ERC) in Notice 2021-20 after publicity of the widespread abuse of the credits, but some have noted that the new review standard may be impermissibly restrictive under the language of the statute (Chris Ferguson, “IRS Policy, Chevron Ruling May Prove ERC Claims Unsustainable,” Bloomberg Tax, Aug. 1, 2024, https://tinyurl.com/mrx379kc).
Long-Term Impact
As Loper Bright and Corner Post have made the legal landscape more favorable for challenges to regulations and sub-regulatory interpretations, it is expected that the number of such regulatory challenges will increase. Because courts will no longer give deference to regulations promulgated without an express grant of statutory authority, courts will be forced to engage in the merits of tax law questions, passing judgment on difficult technical issues. Although some courts may consider the technicality of a subject to weigh in favor of de facto deference to the IRS, other courts may more carefully weigh the IRS’s interpretation against options proposed by plaintiffs.
With an increasing number of cases being brought in forums across the country, and without Chevron deference to reduce the impact of individual judges and district courts, different courts may reach different conclusions regarding the validity of regulations. Disuniformity in tax law could prove to be a serious problem, as different applications of the rules encourage games-manship, lead to unfair treatment based on geographic location, and promote uncertainty and more litigation. Tax law is one of the few areas in which the framers wrote uniformity into the text of the Constitution (Article I, Section 8, Clause 1), and it remains to be seen whether Loper Bright and Corner Post will threaten that balance.
