WHAT WILL IRS DO WITH LOPER BRIGHT?

The Supreme Court recently turned the regulatory world on its head in Loper Bright Enterprises v. Raimondo,144 S.Ct. 2244 (2024). The Court rejected the “Chevron deference” standard that the courts had applied to agency regulations (including Treasury Regulations) for the past 40 years. See, Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.  467 U.S. 837 (1984).  Instead of being forced to adopt any reasonable IRS interpretation in a Treasury Regulation, Loper Bright now requires the courts to decide if a regulation correctly implements the statute. IRS has relied heavily on Chevron deference over the years. The question is how will IRS address Loper Bright?

 We have a pending case that provides some insight into this question. The Tax Court issued an opinion on our case, basing its opinion on a prior Chevron deference case. We filed a motion for reconsideration based on the intervening Loper Bright ruling.

 The IRS response was illuminating. IRS first argued that Loper Bright changed nothing in our case because IRS was not relying solely on a Treasury Regulation, but rather on a case that adopted the regulation under Chevron. IRS argued that the Tax Court’s judicial precedent should be honored even though the result in the prior case was dictated by Chevron. IRS quoted Loper Bright that prior cases are “still subject to statutory stare decisis despite [the Court’s] change in interpretive methodology,” 144 S.Ct. at 2273.

 The Supreme Court in Loper Bright, however, made clear that weight should be given to prior precedent only based on the quality of its analysis. 144 S.Ct. at 2270.  As in our case, there are many prior cases that evaluated regulations under Chevron by explicitly declining to do any interpretive work beyond determining if the regulation was a reasonable implementation of the statute. Since the standard is no longer reasonableness, little of value is left in these cases for stare decisis now that Chevron deference is gone.

 IRS next seemed to harken back to the popular characterization of Treasury Regulations summarized in Rogovin, “The Four Rs: Regulations, Rulings, Reliance and Retroactivity: A View from Within.” (49 CCH Federal Tax Guide Reports No.8 (1965)). This analysis broke Treasury Regulations down into three categories with differing degrees of judicial deference: legislative regulations, interpretative regulations and procedural regulations.

 IRS argued in our case that if a regulation was a legislative regulation (i.e., there was an express delegation to IRS to enact regulations to flesh out the statute), Loper Bright really doesn’t change anything. IRS focused particularly on this quote discussing express statutory delegation of authority: “When the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits … , and ensuring the agency has engaged in  ‘reasoned decisionmaking’  within those boundaries,” Loper Bright, 144 S.Ct. at 2263.

 While this may suggest some deference to an agency interpretation when there has been an express delegation, it is important to note the Supreme Court also specifies that the courts should always independently review and interpret the statute before deferring. IRS asked for more time to respond in our case to coordinate with National Office on the positions taken. It is therefore likely that IRS will persist with this position. This argument will inevitably lead to IRS grasping at straws to find express delegations of regulatory authority, often (as in our case) when none exists.

 Ultimately, based on what we have seen from IRS so far, IRS has made a weak argument that cases that deferred to agency interpretations and explicitly declined to independently interpret statutes based on Chevron are useful precedent.  Loper Bright clearly requires independent judicial analysis of legislative intent, both for the case at issue and for any precedent upon which IRS seeks to rely.

 IRS’s attempt to revive the old “legislative regulation” deference is similarly unconvincing. In the new Loper Bright world, judges (not IRS) decide if a regulation validly enacts the legislative purpose. As is stated in the Supreme Court’s main gripe regarding Chevron, “Chevron does not prevent judges from making policy. It prevents them from judging.” 144 S.Ct. at 2267.

—James and Steven Mather