IRS should brace for more taxpayer lawsuits after Chevron’s death

Technically, the U.S. Supreme Court ruling in the case Loper Bright Enterprises v. Raimondo now requires courts to find the best interpretation of the statute and — in tax cases — not side with the IRS if its regulatory interpretation is “reasonable.”

On a practical level, Loper Light This is unlikely to represent a significant change in the IRS’s practice of issuing regulations that the agency has consistently believed were the best interpretation of the law. However, it may change taxpayers’ appetite for challenging regulations that require an unfavorable reporting position, knowing that those regulations will now be subject to the “best interpretation” standard.

Death Chevron deference may also require courts to conduct more detailed investigations into statutory interpretation. In practice, however, these changes may not change the outcome in many cases — especially against the background of recent trends in tax case law.

Unlike many other federal agencies, the IRS receives countless requests for regulations and other formal guidance each year from taxpayers, advisors, and other stakeholders—all of whom seek clarity in the application of the law.

Recent regulatory activity suggests Loper Light and death Chevron deference may not reduce that need for interpretive guidance or for the IRS to issue such guidance in response. It also suggests that courts will evaluate provisions intended to curb perceived abuses of the tax code in a different light, although the outcome of that evaluation may not be different from what it would have been in the case Chevron.

The IRS’s regulatory response to the Tax Cuts and Jobs Act of 2017 helps illustrate how Loper Bright can affect regulatory practice. The TCJA introduced new and revised provisions of the old tax code, including a complete overhaul of the tax treatment of cross-border activities. In response, the Treasury Department and the IRS issued hundreds of formal guidances, including more than 50 sets of final regulations.

While certain aspects of the TCJA provisions contained anti-abuse or other taxpayer disadvantages, the overall—if not overwhelming—response from taxpayers to the provisions was favorable. This is because they resolved myriad uncertainties and ambiguities in the TCJA, helping taxpayers plan their affairs and file their returns.

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Whether the thousands of interpretations of the law contained in the TCJA were the best interpretation or one of several reasonable interpretations, most taxpayers filed their returns consistently and moved on even when a more favorable interpretation and reporting position was available. This practice is likely to continue regardless of whether the regulations receive Chevron respect.

There are still exceptions to the practice of following the IRS’s published position when the stakes are high and the taxpayer believes the IRS has gone too far. These cases, and the validity of the regulations they affect, will now be considered under the more rigorous standard of best interpretation Loper Light.

But the result may be the same. Even with Chevron As a result, courts have increasingly been willing to invalidate unfavorable taxpayer regulations—including those issued under the TCJA—often for reasons unrelated to the principle of deference.

According to the best standard of interpretation Loper LightThe IRS will continue to issue guidance, including regulations, interpreting provisions of the tax code that are—or are perceived by the IRS to be—ambiguous. Although it no longer has the authority to Chevron due to respect, these regulations will be treated with less respect Skidmore v Swift & Co.especially if they are issued shortly after the statute’s effective date, have been consistently interpreted by the IRS over time, or the regulation “is based on factual findings within the (agency’s) area of ​​expertise.”

In defending these regulations against challenge, the IRS will undoubtedly argue that its position meets the “best interpretation” standard. Loper Light and should be accepted and used regardless of whether or not respect is shown to it.

Two recent consulting projects may shed light on the extent to which Loper Light impacts taxpayers’ approach to challenging the regulations, the IRS’s response, and the courts’ ultimate assessment of those regulations.

The IRS on June 17 issued notices of proposed rulemaking, an intention to publish future regulations, and a revenue ruling — all designed to prevent taxpayers from using partnership basis adjustments in circumstances the government considers inappropriate. If the significant regulations listed in the notice are issued, taxpayers will have strong incentives to challenge them, and strong arguments as to why they are not a proper interpretation or application of the underlying statutes.

Taxpayers’ incentives to challenge such regulations remain the same. And the validity of those regulations may continue to depend on threshold considerations of statutory authority and compliance with the Administrative Procedure Act—not on whether they adopt the best or only reasonable interpretation of the law.

The second recent consulting project that could be tested Loper Bright’s tax impact includes final regulations implementing broker-dealer reporting requirements for transactions in cryptocurrencies and other digital assets. These regulations implement the tax information reporting requirements mandated by the Infrastructure Investment and Jobs Act and collected more than 44,000 comments.

These reporting rules will impose burdens on a wide range of entities, making them susceptible to challenge. While they do not receive Chevron the courts will show them a certain degree of respect Skidmore respect because they were issued pursuant to an express statutory order.

If challenged, Treasury and the IRS will argue that the estimate is not determinative because the provisions are within the scope of delegated regulatory authority, while taxpayers will likely argue that they are not. The resolution of these positions is unlikely to depend on whether the interpretation of the relevant statutory provisions is best or simply reasonable, so Loper Light may have no impact on the result.

Loper Light will provide taxpayers with a greater incentive to challenge adverse provisions, knowing that the best interpretation, rather than any reasonable interpretation of the statute, will prevail. However, trends in recent case law suggest that these regulatory challenges may succeed regardless of whether Chevron respect.

The cases are Loper Bright Enterprises v. Raimondo, US, 22-451 and Relentless v. Department of Commerce, US, 22-1218, decided June 28, 2024.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael Desmond is a partner at Gibson, Dunn & Crutcher and served as the 48th Chief Counsel of the IRS from 2019 to 2021.

Nicole Butze is an attorney in the global Tax and Litigation group at Gibson Dunn.

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