Loper Bright – Supreme Court Decision – Implications on Tax Regulations
In the Spring 2024 column of TAXFAX, David Antoni, Christopher Hanna and Eric Krienert of Moss Adams authored Loper Bright Goes Up to Supreme Court and Implications for Federal Agency Regulations. The article provided an overview of Loper Bright Enterprises v. Raimondo, Case No. 22-451, certiorari granted (May 1, 2023), for which the Supreme Court heard oral arguments on January 17, 2024. The case set-up a challenge to overturn the Supreme Court’s 1984 Chevron decision, setting restraints on power of federal agencies to write expansive regulations, including U.S. Treasury’s income tax regulations.
On June 28, 2024, the much-anticipated Supreme Court decision in Loper Bright Enterprises v. Raimondo, was delivered by Chief Justice John Roberts, overruling Chevron. In overruling Chevron, the Supreme Court undoubtedly opened the door for an increasing number of taxpayer challenges to the validity and interpretation of US Department of Treasury regulations, leading to increasing instances of taxpayer challenges of controversial regulations through litigation in the courts.
Historically, courts were directed to give federal regulations deference (referred to as “Chevron deference”) when a statute was ambiguous (or silent) and the position taken in the regulation was reasonable. That changed this past summer with the Loper Bright decision.
First, a little primer on Chevron deference
In 1984, the Supreme Court delivered its landmark decision in Chevron ruling that federal courts should defer to a federal agency’s reasonable interpretation of an ambiguous statute that the agency administers even if that court could choose an alternative interpretation. The case established the Chevron doctrine, which outlines a two-step analysis for federal courts when considering challenges to agency interpretations of laws:
1) “First, always, is the question of whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”
2) “If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if a statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”
Chevron put the thumb on the scale in favor of the regulators where the regulation represented a permissible reading of the statute:
“If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.”
In summary, applying the two-step analysis of Chevron, if the statute is silent or ambiguous, reviewing courts will follow agency regulations where such interpretation of a statute is reasonable.
Chevron deference applied to tax regulations: Mayo Foundation for Medical Education and Research v. United States (2011)
In Mayo Foundation for Medical Education and Research v. United States, the Supreme Court concluded that “[t]he principles underlying our decision in Chevron apply with full force in the tax context…We see no reason why our review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as our review of other regulations.”
This 2011 decision of the Supreme Court involved a dispute over whether Mayo’s medical residents at its university hospital medical clinic were exempt from Federal Insurance Contribution Act (FICA) taxes under a specific provision of the Internal Revenue Code of 1986 (“IRC”).
Mayo residents took part in a formal and structured educational program and had written exams. This program provided residents additional education in a specialty to become board certified in that field. The residents typically cared for patients, examining and diagnosing them 50–80 hours a week supervised by senior residents and faculty members.
IRC § 3121(b)(10), in general, provides an exemption from FICA taxable employment for services performed in the employment of a school, college, or university, if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.
Treasury Regulation § 31.3121(b)(10)-2(d)(3)(iii) administrating this section of the IRC provides that the services of a “full-time employee” are not incident to and for the purpose of pursuing a course of study. Therefore, an employee whose normal work schedule is 40 hours or more per week is considered a full-time employee, (“the full-time employee rule”). Therefore, under this regulation, a full-time employee resident’s service is “not incident to and for the purpose of pursuing a course of study,” and accordingly, the resident is not an exempt “student” under IRC § 3121(b)(10).
The District Court held for Mayo, concluding that the regulation’s “full-time employee rule” is inconsistent with the unambiguous text of IRC § 3121(b)(10), which the court understood to dictate that “an employee is a ‘student’ so long as the educational aspect of his service predominates over the service aspect of the relationship with his employer.”
The government appealed and the Eighth Circuit Court of Appeals reversed, applying the Chevron doctrine, concluding “the statute is silent or ambiguous on the question of whether a medical resident working for the school full-time is a ‘student’” for purposes of [IRC] § 3121(b)(10), and Treasury’s regulation “is a permissible interpretation of the statute.”
The Supreme Court applying Chevron upheld Treasury’s regulation, concluding in Mayo Foundation, “We do not doubt that Mayo’s residents are engaged in a valuable educational pursuit or that they are students of their craft. The question whether they are ‘students’ for purposes of [IRC] § 3121, however, is a different matter. Because it is one to which Congress has not directly spoken, and because the Treasury Department’s rule is a reasonable construction of what Congress has said, the judgment of the Court of Appeals must be affirmed.”
An open question remains, would the Supreme Court have decided Mayo Foundation differently under the Loper Bright standard of reviewing regulations? Might the tax cases on validity of tax regulations argued post-Loper Bright provide some clues? We will briefly discuss these cases below after discussing the Loper Bright Supreme Court decision.
Loper Bright Enterprises v. Raimondo (2024)
The Supreme Court agreed to review consolidated cases from the US Courts of Appeals for the District of Columbia Circuit (Loper Bright) and First Circuit (Relentless v. Dept. of Commerce), which questioned the validity of a federal regulation imposed by the National Marine Fisheries Service (NMFS) under its regulatory authority administering the Magnuson-Stevens Act (MSA), which governs fishery management in federal waters.
At issue is whether the NMFS can force domestic vessels in the fishing industry to pay the salaries of the federal observers they are required to carry on board under the MSA. The MSA provides the NMFS may require payment of fees to the agency and the NMFS previously required Alaska vessels to pay such salaries as “necessary and appropriate.” In both of these decisions, the Circuit Courts of Appeals, in applying Chevron, affirmed the summary judgment granted to the government in the underlying District Court decisions in favor of the NMFS, holding that the fishing industry must bear the costs of the federal observers.
In granting certiorari in Loper Bright, the Supreme Court agreed to decide the question presented “[w]hether the Court should overrule Chevron or at least clarify that the statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute ambiguity requiring deference to the agency.”
In granting certiorari, the Court declined to address “[w]hether, under a proper application of Chevron, the MSA implicitly grants NMFS the power to force domestic vessels to pay the salaries of the monitors they must carry.”
Supreme Court’s Decision in Loper Bright
In its opinion in Loper Bright, the Supreme Court rejected the two-step analysis mandated in the Court’s 1984 Chevron decision, noting: “The deference that Chevron requires of courts reviewing agency action cannot be squared with the APA.”
“Congress in 1946 enacted the APA ‘as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.’ Morton Salt, 338 U.S. at 644.”
“The APA delineates the basic contours of judicial review of such action…Section 706 directs that ‘[t]o the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of agency action.’ 5 U. S. C. § 706. It further requires courts to ‘hold unlawful and set aside agency action, findings, and conclusions found to be…[arbitrary, capricious, an abuse of discretion, or otherwise] not in accordance with law;’ § 706(2)(A).”
In addition, § 706(2) of the APA (in part) also requires courts to “hold unlawful and set aside agency action, findings, and conclusions found to be –
(B) contrary to constitutional right, power, privilege, or immunity:
(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;
(D) without observance of procedure required by law;…”
“The APA, in short, incorporates the traditional understanding of the judicial function, under which courts must exercise independent judgment in determining the meaning of statutory provisions. In exercising such judgment, though, courts may…seek aid from the interpretations of those responsible for implementing particular statutes. Such interpretations ‘constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance’ consistent with the APA. Skidmore, 323 US, at 140.”
“In a case involving an agency…the statute’s meaning may well be…the agency is authorized to exercise a degree of discretion. Congress has often enacted such statutes. For example, some statutes “expressly delegate[]” to an agency the authority to give meaning to a particular statutory term. (cite omitted). Others empower an agency to prescribe rules to “fill up the details” of a statutory scheme, (cite omitted), or to regulate subject to the limits imposed by a term or phrase that “leaves agencies with flexibility,” Michigan v. EPA, 576 U. S. 743, 752 (2015), such as “appropriate” or “reasonable.”
“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. The court fulfills that role by recognizing constitutional delegations, “fix[ing] the boundaries of [the] delegated authority,” H. Monaghan, Marbury and the Administrative State, 83 Colum. L. Rev. 1, 27 (1983), and ensuring the agency has engaged in “‘reasoned decision making’” within those boundaries, Michigan, 576 U. S., at 750 (citations omitted)...”.
“Neither Chevron nor any subsequent decision of this Court attempted to reconcile its framework with the APA. The “law of deference” that this Court has built on the foundation laid in Chevron has instead been “[h]eedless of the original design” of the APA. Perez, 575 U. S., at 109, 135 S. Ct. 1199, 191 L.Ed. 2d 186 (Scalia, J., concurring in judgment)” .
“At this point, all that remains of Chevron is a decaying husk with bold pretensions.”
“Chevron is overruled. Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.” .
“Because the D. C. and First Circuits relied on Chevron in deciding whether to uphold the Rule, their judgments are vacated, and the cases are remanded for further proceedings consistent with this opinion.”
Interestingly, the Court’s opinion appears to specifically not affect prior cases, as the decision reads, “Chevron was a judicial invention that required judges to disregard their statutory duties…however, we do not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful—including the Clean Air Act holding of Chevron itself—are still subject to statutory stare decisis despite our change in interpretive methodology.”
Does this mean for example, the Supreme Court’s decision in Mayo Foundation cannot be relitigated to change the outcome of its holding, barring a change in legislation? Will a medical university relitigate Mayo Foundation arguing Treasury Regulation §31.3121(b)(10)-2(d)(3)(iii) is invalid in the aftermath of Loper Bright?
What has been the Government’s reaction to the Loper Bright decision?
The Government reaction has generally been that “nothing has changed,” arguing their regulations represent the best reading of the statute and are therefore valid and/or they were promulgated in accordance with delegated authority.
This is illustrated by what has happened in Loper Bright since the Supreme Court decision. The Supreme Court did not decide whether the position taken in the regulation in question represented the “best reading of the statute.” Rather, the case has been remanded to the lower court (the Court of Appeals for the District of Columbia Circuit for Loper Bright and First Circuit for Relentless) to decide that question. The Government is, of course, continuing to argue that the regulation is valid.
At a January 16, 2025 conference hosted by the District of Columbia Bar Tax Community, the section chief of the Justice Department Tax Division’s appellate section said there is an influx of cases invoking Loper Bright as new precedent on regulatory deference but without challenging a regulation, seemingly to attempt to expand the application of its precedent. As such, to date the chief sees Loper Bright as a narrow rule.
Where does the Loper Bright decision stand today on remand back to the D.C. and First Circuits
On remand to the D.C. Circuit, oral argument in Loper Bright was held before the D.C. Circuit Court on November 4, 2024. The attorney for the Government arguing before the D.C Circuit Court, stated the best reading of the MSA statute is that it does authorize the NMFS to require the domestic vessels in the fishing industry to pay the salaries of the federal observers consistent with the statute, which provides:
“Any fishery management plan which is prepared by any Council, or by the Secretary, with respect to any fishery, shall— contain the conservation and management measures, applicable to foreign fishing and fishing by vessels of the United States, which are—necessary and appropriate for the conservation and management of the fishery to prevent overfishing and rebuild overfished stocks, and to protect, restore, and promote the long-term health and stability of the fishery;” (16 USCS § 1853(a)(1)(A)).
Thus, the Government’s argument essentially is there should be no change in the court’s original decision even with the overturning of Chevron. The Government argues applying the new standard of Loper Bright, the statutory language empowers the NMFS to promulgate “conservation and management measures…necessary and appropriate for the conservation and management of the fishery….” Meaning, “necessary and appropriate” includes within its scope a NMFS rule requiring the fishing vessels to pay the salaries of the observers. This seems far-fetched when 16 USCS § 1853(b)(1) states only that such vessels “…may require a permit to be obtained from, and fees to be paid to, the Secretary [NMFS],...” How does this translate to paying the salaries of the observers?
We are awaiting the decision of the D.C. Circuit on remand. How will the D.C. Circuit Court interpret the language “necessary and appropriate” in light of Loper Bright?
In the case of Relentless, the First Circuit remanded the case to the District Court of Rhode Island.
What will be Loper Bright’s impact today and in the future on disputes involving Treasury’s tax regulations as well as other non-tax federal agency regulations?
The full extent of the impact is yet to be seen; however, from the number of tax cases citing Loper Bright so far, the decision is likely to have a broad impact on tax disputes involving regulatory challenges. Of course, it is going to be (and already has been) raised in many ongoing disputes over the validity of tax regulations, with the following examples:
Varian Medical Systems, Inc. v. Commissioner, 163 T.C. No. 4 (August 26, 2024) – The Tax Court rejected an Internal Revenue Service (“IRS”) attempt to “correct” a fiscal year glitch in the Tax Cuts and Jobs Act (“TCJA”) by a regulation (Treas. Reg. § 1.78-1) contrary to the plain language of § 78 of the IRC as amended by TCJA. The Tax Court held for the taxpayer on the basis of the plain reading of the statute, citing Loper Bright. The Tax Court chose to disregard Treas. Reg. § 1.78-1 without invaliding it “we need not address the many other arguments the parties raise regarding the procedural and substantive validity of amended Treasury Regulation § 1.78-1.” Query: the 90-day appeal period has expired, curious why the Government did not appeal the decision in this case?
Schwarz v. Commissioner, T.C. Memo 2024-55 (May 13, 2024) – On November 5, 2024, the Tax Court granted a rehearing to consider the validity of the IRC § 183 hobby loss regulations (Treasury Regulations §§ 1.183-1(d)(1) and 1.183-2(b)) which if followed, require treating land ownership and farming as separate activities. The petitioners filed a motion on September 17, 2024, alleging that significant portions of the regulations are invalid. Petitioners are relying on Loper Bright, which was issued after the original Tax Court decision. They did not include a comprehensive legal argument in their motion. For example, petitioners did not cite or discuss IRC § 7805(a), in which Congress provided that “the Secretary shall prescribe all needful rules and regulations for the enforcement of this title.”
3M Co. & Subsidiaries, Inc. v. Commissioner, 160 T.C. 50 (2023) – On February 9, 2023, the Tax Court cited Chevron in holding Treasury Regulations § 1.482-1(h)(2) as a valid regulation because it was a reasonable agency interpretation of an ambiguous statute and thus merited deference under the Chevron test. The regulation was found to be properly promulgated under the APA (5 U. S. C. § 706(2)(A)). The regulation required 3M’s U.S. taxable income be increased to reflect the arm's length compensation a Brazilian subsidiary should have paid for intellectual property under IRC § 482. This income is blocked under Brazilian law from being distributed. 3M appealed the Tax Court’s decision to the U.S. Court of Appeals for the Eighth Circuit (Appellate Case: 23-3772). In its October 3, 2024 supplemental brief, 3M cited Loper Bright arguing the regulation is invalid as Chevron, which the Tax Court relied on in its decision, has been overturned.
Halliburton Co. v. United States, pending in U.S. District Court for the Southern District of Texas – Houston Division - Case 4:24-cv-02149 – does the doctrine of variance preclude Halliburton from challenging a regulation when the challenge was not included in its refund claim? The taxpayer is contending Treasury Regulation § 1.162-21(b)(1)(iii) is invalid under Loper Bright.
Memorial Herman Accountable Care Organization v. Commissioner, 134 AFTR 2d 2024-5971 (5th Cir. 2024) – Loper Bright cited as one reason for rejecting taxpayer’s reliance on a regulation.
Lissack v. Commissioner, 135 AFTR2d 2025-xxxx (D.C. Cir. 2025), which applied Loper Bright and found the IRS’s interpretation of IRC § 7623 to be the most reasonable. Lissack addressed when a whistleblower can challenge the IRS’s decision not to pay an award. The whistleblower brought a taxpayer to the agency’s attention, but the IRS collected based on a theory unrelated to the whistleblower’s submission.
Monitoring the outcome of these cases and others like them to come will be interesting in the development of the Loper Bright doctrine of pushing back on expansive federal agency rules.
How will judges react and apply Loper Bright’s mandate to determine the best reading of the statute?
With Chevron as the framework, deferring to a regulation was an easy way for a judge to resolve a case in the Government’s favor, particularly for lower courts who felt bound to do so. The fact that a regulation may be determined under Loper Bright to not be entitled to deference does not mean that a taxpayer will automatically win its case. A taxpayer will still need to convince the judge that its reading of the statute and of the scope of any delegated authority to write regulations is the best one. But there are many ways a judge can still find in the Government’s favor without giving deference to a regulation. The judge could independently determine the result and conclude the regulation is the best meaning of the statute.
Loper Bright shines a new focus on the best reading of the statute and any delegations
Courts are directed to determine the best meaning of the statute – increased focus on the actual words Congress used in writing the statute and the traditional tools to be used in interpreting statutes. Regulations may be given respect to the extent they deserve respect (Skidmore deference), but not blind deference.
In addition, there will be new focus on what a statute provides with respect to the authority to write regulations. Is there delegated authority? The IRC is replete with delegations giving the Treasury/IRS authority to write regulations. A recent article identified over 200 delegations of one kind or another. If so, is the delegation general (IRC § 7805(a)), broad (“…the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”), or specific such as in the case of the IRC § 1502 consolidated return regulations (“The Secretary shall prescribe regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return….may be returned…assessed…in such manner as clearly to reflect the income-tax liability…”)? Is the regulation in question within the scope of the applicable delegated authority?
Constitutional limits on delegation and “major questions” doctrine
Are there constitutional limitations on the ability of Congress to delegate regulation writing authority to administrative agencies? This may become an area of focus going forward. One attitude – the legislature’s role is “only to make laws, and not to make legislators.” Currently – courts apply a broad “intelligible principle” standard to delegations and have been reluctant to hold delegations unconstitutional.
Will this standard be revisited? For instance, must a delegation be “sufficiently definite and precise to enable Congress, the courts, and the public to ascertain” whether Congress’s guidance has been followed. This view has been expressed by some of the conservative members of the Court – for example, Justice Gorsuch’s dissent in Gundy v. United States, 139 S. Ct. 2116 (2019).
Is there a distinction in the weight of deference to Treasury regulations whether Congress’ delegation of authority was general or specific?
In Mayo Foundation, the Court noted in two of its earlier 1980’s decisions “…predating Chevron, this Court stated that ‘we owe the [Treasury Department's] interpretation less deference’ when it is contained in a rule adopted under that ‘general authority’ than when it is ‘issued under a specific grant on authority to define a statutory term or prescribe a method of executing a statutory provision.’” Noting further “…the administrative landscape has [since] changed significantly. We have held that Chevron deference is appropriate ‘when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority. Our inquiry in that regard does not turn on whether Congress’ delegation of authority was general or specific.”
It appears after Mayo Foundation, there is less distinction between “general” or “specific” delegation in the Supreme Court’s view. However, that will not likely stop either taxpayers or the IRS from putting weight on that distinction in crafting a position that Treasury had greater or lesser delegated authority to write a regulation.
To repeat Chief Justice Roberts words in his Loper Bright ruling, “And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it.”
This raises two questions: Does respecting the delegation mean merely acknowledging or noting it, or something more, such as giving some weight to it?
And, how, if at all, does the Court’s opinion and the delegation language impact the “major questions” doctrine, preventing agencies from resolving questions of “vast economic and political significance” without clear Congressional authorization, and the non-delegation doctrine preventing Congress from delegating its legislative powers to an agency?
Before Loper Bright, the Supreme Court over the years invalidated several regulations invoking what has become known as the “major questions” doctrine. In Loper Bright, Chief Justice Roberts noted: “Most notably, Chevron does not apply if the question at issue is one of deep economic and political significance. … We have instead expected Congress to delegate such authority expressly if at all, … for extraordinary grants of regulatory authority are rarely accomplished through ‘modest words’, ‘vague terms’, or ‘subtle devices,’...” (internal punctuation deleted).
This presumption against delegation of “major questions” probably continues under Loper Bright as a tool for determining the scope of delegated authority to write regulations. Could it morph from a “major questions” to a “significant questions” doctrine?
On November 22, 2024, the Supreme Court granted certiorari in a case appealed from the United States Court of Appeals for the Fifth Circuit, in which a challenge was made to Federal Communications Commission regulations related to the Universal Service Fund, raising nondelegation doctrine and mootness issues. The questions to be decided by the Supreme Court include:
• Whether Congress violated the nondelegation doctrine by authorizing the Commission to determine the amount that providers must contribute to the Fund.
• Whether the Commission violated the nondelegation doctrine by using the Administrator's financial projections in computing universal service contribution rates.
• Whether the combination of Congress's conferral of authority on the Commission and the Commission's delegation of administrative responsibilities to the Administrator violates the nondelegation doctrine.
Will there be changes in how regulations are promulgated?
Perhaps, the IRS will be deterred from taking some potentially contentious positions in regulations. More likely, little will change. However, the notices accompanying proposed regulations and the preambles of proposed and final regulations may include more careful explanations of the basis for controversial positions. They also may contain more careful discussion of what the Treasury/IRS is relying on as the basis for their authority to write the regulations.
Statements of the sort often included in regulations about reliance on the regulations (or on proposed regulations) may be rethought. One Treasury attorney recently observed: “Whether we actually state in the rules going forward that they can be relied on, I think it’s become questionable whether that’s the right approach.” However, she then observed that the IRS would not question a taxpayer’s reliance on proposed regulations.
What will be the impact on the legislative process in Congress?
Will Congress change how it drafts statutes including any grants of regulatory authority? Ambiguity and delegation of authority to fill in details often are important tools in getting legislation passed. However, inevitably there will be greater focus on what the statute being drafted says about delegations of regulation writing authority to the Treasury/IRS.
DOGE plans, among other things, to run with Loper Bright
After citing West Virginia and Loper Bright, Elon Musk and Vivek Ramaswamy observed in a recent article outlining their plans:
“Together these cases suggest that a plethora of current federal regulations exceed the authority Congress has granted under the law.
“DOGE will work with legal experts embedded in government agencies, aided by advanced technology, to apply these ruling to federal agencies. DOGE will present this list of regulations to President Trump, who can, by executive action, immediately pause the enforcement of those regulations and initiate the process for review and recission. …
“When the president nullifies thousands of such regulations, critics will allege executive overreach. In fact, it will be correcting the executive overreach of thousands of regulations promulgated by administrative fiat that were never authorized by Congress.”
• Excerpt from The Wall Street Journal article: “Elon Musk and Vivek Ramaswamy: The DOGE Plan to Reform Government. Following the Supreme Court’s guidance, we’ll reverse a decades long executive power grab.” November 20, 2024.
The AIA complicates challenges to tax regulations
The Anti-Injunction Act (“AIA”) (§ 7421), dating back to 1867, generally precludes pre-enforcement challenges to tax regulations. The purpose of the AIA is to protect the Government’s ability to collect taxes without interference from suits for injunctions. The result is that suits cannot be brought to enjoin tax regulations, complicating the process of challenging tax regulations. This slows the process. Industry-wide efforts to challenge regulations through litigation, while still possible, are more difficult.
A few words on filing a tax return with a position contrary to a regulation
Taxpayer challenges will most likely take the form of filing a tax return with a tax position contrary to a regulation on an originally filed tax return or a “qualified amended return” – (see Treas. Reg. § 1.6664-2(c)(3) for definition of a “qualified amended return”) with the position generally reported on Form 8275-R – Regulation Disclosures Statement.
The procedures and implications for making a challenge to a regulation on a tax return is beyond the scope of this article. Taxpayers should consult their tax advisor for advice and guidance on the particular technical and procedural matters to be encountered before mounting a challenge to a regulation.
Suffice to say, challenging a tax regulation, especially for major issues of significance, can be slow, resource consuming, uncertain and expensive. In addition, it is unlikely that settlement of a challenged regulation would be resolved at exam or appeals. A taxpayer challenge to a regulation on a tax return, which is raised by the IRS on audit, will likely result in litigation of the issue in court for it to be resolved in the taxpayer’s favor.
Taxpayers will also need to consider and take steps to carefully consider the strength of the technical authorities in support of their tax return position to mitigate potential penalties that could be assessed in the event the taxpayer is ultimately unsuccessful in sustaining its tax position against a regulation.
Additionally, taxpayers will need to consider the financial statement impacts of tax positions in terms of whether their position is more likely than not of being sustained and measuring the tax benefit (including rules for measuring any required reserves for uncertain tax benefits) to be recorded in the financial statements in accordance ASC 740, Accounting for Income Taxes under Generally Accepted Accounting Principles (“GAAP”).
Considering recent controversial regulations that may see taxpayer challenges
Ever since the Loper Bright decision was handed down in June, it seems almost every week in the tax press there is an article referencing Loper Bright, speculating on which recent Treasury regulations may see challenges by affected taxpayers.
Some of the most mentioned regulations speculated for challenge include the August 2024 dual consolidated loss (DCL) rules – plus a new set of rules know as disregarded payment loss (DPL) rules, which were just finalized by Treasury on January 10, 2025, pushing back on taxpayer criticisms. Additionally, another popular candidate is the one percent excise tax stock buyback regulations issued under IRC § 4501, enacted under the Inflation Reduction Act of 2022. Additionally, recent foreign tax credit (“FTC”) regulations finalized in 2022 caused so much controversy they are mostly on hold until Treasury figures out how to rewrite them. In addition, the Corporate Alternative Minimum Tax (“CAMT”) FTC proposed regulations released in September have met with taxpayer complaints that these rules unfairly disallow use of the FTCs under CAMT in certain situations where the statute supports utilization of the FTCs to avoid double taxation. These are just some popular examples with other regulations identified as problematic for possible challenge in international tax, transfer pricing and partnership tax arena.
Taxpayers may likely be tactical in their approach in deciding on challenging a Treasury regulation, by for example, taking into account the political party of the administration in power at the time the regulation was issued, or any ability a taxpayer may have on the selection of a court (Tax Court, District Court or Court of Federal Claims) that may have a position favorable to the taxpayer.
In Loper Bright, Chief Justice Roberts warns in his opinion that “judges ‘are not part of either political branch.’ Indeed. Judges have always been expected to apply their ‘judgment’ independent of the political branches when interpreting the laws those branches enact,” citing The Federalist No. 78, at 523. “And one of those laws, the APA, bars judges from disregarding that responsibility just because an Executive Branch agency views a statute differently.”
Considering the IRC § 199A(g) regulations
A taxpayer may consider challenging the IRC § 199A(g) regulations’ position with respect to nonpatronage agricultural products in a post-Chevron world. Some initial thoughts a taxpayer should consider in developing a tax filing position include:
• The legislative history on enactment of IRC § 199A(g) (domestic production activities deduction (“DPAD”)) evidences a general Congressional intent to reenact the IRC § 199 provisions for specified agricultural or horticultural cooperatives’ qualified production activities income (“QPAI”) attributable to agricultural products within IRC § 199A(g) as part of the TCJA.
• IRC § 199A(g)(3)(D) states in general that domestic production gross receipts (“DPGR”) means gross receipts of the taxpayer which are derived from the sale, exchange or other disposition of any agricultural or horticultural product which was manufactured, produced, grown, or extracted (“MPGE”) by the specified agricultural cooperative (including agricultural products MPGE by patrons of a specified agricultural marketing cooperative known as the “patron attribution rule”). The statutory language and the legislative history support the view that DPGR includes gross receipts derived from sale of all agricultural products attributable to both patronage and nonpatronage business.
• For nonexempt cooperatives, the IRC § 199A(g) Treasury regulations exclude DPGR attributable to sale of nonpatronage products, but for exempt IRC § 521 cooperatives, these regulations include DPGR attributable to sale of nonpatronage products.
• Applying Loper Bright, can it be sustained that this distinction in the regulations represents the best reading of the IRC § 199A(g) statute and legislative history?
Is there ambiguity (or silence) in the statute and does Treasury/IRS have the delegated authority to address that ambiguity by regulation? How will Loper Bright affect this answer?
• IRC § 7805(a) (“…all needful rules and regulations for the enforcement of this title…including…necessary… by reason of any alternation of law in relation to internal revenue”). (this statute provides general interpretive regulatory authority for all IRC sections)
• IRC § 199A(f)(4) (in IRC § 199A before IRC § 199A(g) was added) – “… such regulations as are necessary to carry out the purposes of this section, including regulations – (A) for requiring or restricting the allocation of items and wages under this section and such reporting requirements as the Secretary determines appropriate, and (B) for the application of this section in the case of tiered entities”.
• IRC § 199A(h) (in IRC § 199A before IRC § 199A(g) was added) – “The Secretary shall – (1) apply rules similar to the rules under section 179(d)(2) in order to prevent the manipulation of the depreciable period of qualified property using transactions between related parties, and (2) prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.”
• IRC § 199A(g)(6) – “The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this subsection, including regulations which prevent more than 1 taxpayer from being allowed a deduction under this subsection with respect to any activity described in paragraph (3)(D)(i). Such regulations shall be based on the regulations applicable to cooperatives and their patrons under section 199 (as in effect before its repeal).”
(1) What are the “purposes of this subsection?”
(2) What does it mean to say that the “regulations shall be based on the regulations applicable to cooperatives and their patrons under section 199 (as in effect before its repeal)?”
With regard to these questions, taxpayers entertaining a challenge to the regulations will need to research and identify relevant authorities in determining a best reading of the statute in supporting a position that Treasury erred in its regulations by excluding DPGR attributable to sale of nonpatronage products for nonexempt cooperatives.
In summary
The Loper Bright decision eliminating Chevron deference is a positive development. It takes the thumb off the scale that previously favored the Treasury/IRS. A taxpayer must still convince a judge that its position represents the best reading of the statute.
Challenging a tax regulation has sunlight with Loper Bright – but still remains challenging.
To read more articles from The Cooperative Accountant, please visit
2 This case was on appeal from the U.S. Court of Appeals for the DC Circuit, Loper Bright Enters. v.
Raimondo, 45 F.4th 359 (DC Cir., Aug. 12, 2022).
3 The Supreme Court also granted certiorari on October 13, 2023, in Relentless, Inc. v. Department of Commerce, Case No. 22-1219, raising essentially the same issues as Loper Bright. This case was on appeal from the U.S. Court of Appeals for the First Circuit, Relentless, Inc. v. Department of Commerce, 62 F.4th 621 (1st Cir., March 16, 2023). The Supreme Court consolidated both cases. In granting certiorari, the Supreme Court agreed to decide the question presented: “[w]hether the Court should overrule Chevron or at least clarify that the statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute ambiguity requiring deference to the agency.”
4Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 US 837 (1984).
5144 S. Ct. 2244 (2024).
6Chevron, 467 US at 842-843.
7Id. at 843-844.
8Id. at 843-844.
9562 US 44 (2011).
10 Id. at 55-56.
11 Mayo Foundation for Medical Education and Research v. United States, 503 F. Supp. 2d 1164 (D. Minn.
2007)
12 Mayo Foundation for Medical Education and Research v. United States, 568 F.3d 675 (8th Cir. 2009).
13 Mayo Foundation, 562 US at 60.
14 Loper Bright Enterprises v. Raimondo, Case No. 22451, certiorari granted (May 1, 2023).
15 Id.
16 Loper Bright, 144 S. Ct. at 2263 (referring to the Administrative Procedure Act of 1946 (“APA”)).
17 Id. at 2261.
18 Id.
19 Id. at 2262.
20 Id. at 2263.
21 Id.
22 Id. at 2265.
23 Id. at 2272.
24 Id.
25 Id.
26 Id
27 Skidmore v. Swift & Co., 323 U.S. 134 (1944)
28 Mayo Foundation, 562 US 44, 56-57 (2011).
29 Loper Bright, 144 S. Ct. at 2272.
30 Id. at 2269.
31 Consumers’ Research Cause Based Commerce, Inc. v. Federal Communications Commission, 109 F.4th
743 (5th Cir. 2024).
32 Loper Bright, 144 S. Ct. at 2272.