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15 July 2024
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At the end of its 2023 term, the Supreme Court issued two opinions that will drastically change how taxpayers can challenge Department of Treasury (Treasury)...
United States Tax
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At the end of its 2023 term, the Supreme Court issued twoopinions that will drastically change how taxpayers can challengeDepartment of Treasury (Treasury) and Internal Revenue Service(IRS) regulations and significantly impact tax administration.
On June 28, 2024, the Supreme Court issued a 6-3 opinion,divided among ideological lines, in Loper Bright Enterprises v.Raimondo that overturned the 40-year old doctrine of judicialdeference to reasonable administrative agency interpretations ofambiguous federal statutes announced in Chevron v.NRDC.1 Chevron established that if afederal agency applied and interpreted a statute in a reasonablemanner, such interpretation is entitled to judicialdeference.2
Chevron relied on the premise that federal agencieshave the specialized expertise to interpret legislation and issueregulations in specialized areas of law and for highly regulatedindustries. In tax cases, this meant that courts would often deferto technical Treasury and IRS regulations interpreting the InternalRevenue Code.
Before the ink barely dried in the Loper Brightdecision, the Supreme Court issued another 6-3 opinion, dividedamong ideological lines, three days later in Corner Post v.Board of Governors of the Federal Reserve that effectivelyexpands the statute of limitations for challenging agencyregulations by holding that challenges to federal regulations maybe able to be brought many years after the regulation took effect,depending on when the challenger was injured by the regulation inquestion.3
Taken together, these decisions may open the door to several newcases challenging Treasury and IRS rules and regulations.
Supreme Court Overturns Chevron Deference
Loper Bright holds that Chevron deference wasinconsistent with the judiciary's exclusive authority tointerpret the meaning of statutes.4 The Court emphasizedthe doctrine's incongruity with Section 706 of theAdministrative Procedures Act (APA), which directs that in reviewof agency action, "the reviewing court shall decide allrelevant questions of law, interpret constitutional and statutoryprovisions, and determine the meaning or applicability of the termsof an agency action."5 The Supreme Court explainedthat while an executive agency's interpretation of itsauthority could be persuasive under Skidmoredeference,6 depending on the facts, it cannot be bindingon a reviewing court.7
The decision's penultimate paragraph aptly summarizes thenew paradigm:
Chevron is overruled. Courts must exercise theirindependent judgment in deciding whether an agency has acted withinits statutory authority, as the APA requires. Careful attention tothe judgment of the Executive Branch may help inform that inquiry.And when a particular statute delegates authority to an agencyconsistent with constitutional limits, courts must respect thedelegation, while ensuring that the agency acts within it. Butcourts need not and under the APA may not defer to an agencyinterpretation of the law simply because a statute isambiguous.8
Taxpayers Can Now Challenge an Agency Action Until FirstInjured by an Agency Action.
In a case that is not quite as far reaching, the Supreme Courtheld in Corner Post that a claim under the APA tochallenge an agency action first comes into being when theplaintiff is injured by final agency action, not necessarily whenthe agency action (such as a final rule) is first promulgated.
The APA has a six-year statute of limitations to challengeagency rules that requires "the complaint to be filed withinsix years after the right of action firstaccrues."9 In the "Durbin Amendment" tothe Dodd-Frank Act, Congress directed the Federal Reserve Board toadopt regulations implementing a reasonable debit card swipefee, i.e., the fee that banks charge merchants to processa debit transaction.10 The Federal Reserve Board adoptedrules in 2011; and if the six-year statute of limitations wereapplied based on when the rule was adopted, new cases challengingthe rule on its face could not be brought after 2017.
Corner Post, a business that did not even exist at the time theregulations were adopted, argued that it would be fundamentallyunfair to deprive it of its day in court simply becauseothers had already had six years to challenge the rule.The Supreme Court concluded that the six-year statute oflimitations could not be strictly applied to deny a business thatdid not exist when the regulation was initially promulgated anopportunity to challenge the regulation. The Court held the statuteof limitations begins to run when the rule is first applied to thebusiness.11 The Court rejected arguments that the pointof accrual for challenging regulations should be measured from thedate any plaintiff was injured. Instead, the Court considered"deep-rooted historic tradition that everyone should have hisown day in court."12
Impact on Taxpayers
Taxpayers are already starting to use the Loper Brightdecision. In Tribune Media Co. v. Commissioner, thetaxpayer is appealing a Tax Court decision and wrote to the SeventhCircuit to urge the court to apply Loper Bright scrutinyto review Treasury's assertion of authority to promulgatepartnership anti-abuse regulations.13 In 3M Co. v.Commissioner, the taxpayer filed a similar letter with theEighth Circuit arguing that Loper Bright's reversal ofChevron nullifies the Tax Court's argument regardingan ambiguity in the transfer pricing statute and regulations thatwarrants reversal of the Tax Court's opinion.14
In recent years, courts have struck down Treasury and IRSregulations for violating the APA and this trend is likely tocontinue. Corner Post, paired with the opinion inLoper Bright, has potential to open a range oflongstanding Treasury and IRS regulations to new challenges. As aresult, taxpayers should consider the tax positions taken inpreviously filed returns to determine whether to file a refundclaim or protective claim.
However, the Supreme Court warned in Loper Bright thatit would not reconsider its prior decisions that had been decidedunder Chevron simply because Chevron had beenoverruled and that statutory stare decisis would continue tocontrol.15
It is likely that courts of appeals will adopt the samerule—meaning that the circuit courts are unlikely toreconsider settled decisions simply because Chevron hasbeen overruled. As the Corner Post case illustrates, itmight be possible to challenge a regulation in a different circuitwhere it had not been previously challenged, as long as a newplaintiff could be found that has the regulation applied to it forthe first time within the last six years. This is likely to lead toa much busier docket for the next several years and beyond for theSupreme Court and courts of appeals as well.
Footnotes
1. Loper Bright Enters. v. Raimondo, Nos. 22-451and 22-129, Slip Op. (U.S. Jun. 28, 2024), availableat https://www.supremecourt.gov/opinions/23pdf/22-451_7m58.pdf.
2. Chevron USA Inc. v. Natural Resources DefenseCouncil, 467 U.S. 837 (1984).
3. Corner Post, Inc. v. Board of Governors of theFederal Reserve System, No. 22-1008, Slip. Op. (U.S. July 1,2024), available at https://www.supremecourt.gov/opinions/23pdf/22-1008_1b82.pdf.
4. Loper Bright at 7-9.
5. Id. at 13-14 (citing 5 U.S.C. §706).
6. The name comes from Skidmore v. Swift &Co., 323 U. S. 134 (1944), which held that the"interpretations and opinions" of the relevant agency,"made in pursuance of official duty" and "based upon. . . specialized experience," "constituted a body ofexperience and informed judgment to which courts and litigantscould properly resort for guidance," even on legal questions.Id. at 139–140. "The weight of such a judgmentin a particular case...depends upon the thoroughness evident in itsconsideration, the validity of its reasoning, its consistency withearlier and later pronouncements, and all those factors which giveit power to persuade, if lacking power to control."Id. at 140.
7. Loper Bright at 21.
8. Id. at 35.
9. 28 U.S.C. § 2401(a).
10. 15 U.S.C. §1693o–2(a)(3)(A).
11. Corner Post at 10.
12. Id. at 21-22.
13. Letter from Joel V. Williamson, Counsel for TribuneMedia Company to Christopher G. Conway, Clerk of Court, U.S. Courtof Appeals for the Seventh Circuit, Re: Tribune Media Companyv. CIR, Nos. 23-1135, -1136, -1242, & -1243 (Jul. 3,2024), available at https://www.taxnotes.com/tax-notes-today-federal/litigation-and-appeals/tribune-media-says-loper-bright-applies-antiabuse-rule-validity/2024/07/09/7kggb.
14. Letter from Jonathan C. Bond, Counsel for 3M Companyto Maureen W. Gornik, Acting Clerk of Court, U.S. Court of Appealsfor the Eighth Circuit, Re: No. 23-3772, 3M Company &Subsidiaries v. Commissioner of Internal Revenue—NoticeOf Supplemental Authorities Pursuant To Federal Rule of AppellateProcedure 28(j) (Jul. 3, 2024), available at https://www.taxnotes.com/tax-notes-today-international/litigation-and-appeals/3m-says-loper-bright-supports-reversal-transfer-pricing-appeal/2024/07/09/7kgg7.
15. Loper Bright at 34.
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