Will Loper-Bright Have Any Impact on Tax Litigation with the IRS?


Recently, in Relentless Inc. v. U.S. Department of Commerce and Loper Bright Enterprise v. Raimondo, the Supreme Court overruled more than four decades of deference to federal agencies known as the Chevron doctrine. Under the Chevron doctrine, federal courts were often required to defer to “permissible” agency interpretation of the statutes those agencies administer-even when a reviewing court reads the statute differently. The Supreme Court held in Loper-Bright that the Administrative Procedure Act (“APA”) requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. This article discusses the impact that Loper-Bright will have on tax litigation cases involving the Internal Revenue Service (“IRS”).
The Application of the APA to Federal Agencies
Congress in 1946 enacted the APA “as a check upon administrators whose zeal might otherwise have carried them to excess not contemplated in legislation creating their offices.” The APA prescribes procedures for federal agency action and delineated the basic contours of judicial review of such action. And it codifies for agency cases the unremarkable, yet elemental proposition reflected by judicial practice dating back to Marbury v. Madison, 5 U.S. 137 (1803): that courts decide legal questions by applying their own judgment. The APA specifies that courts, not federal agencies, such as the IRS, will decide “all relevant questions of law” arising on review of agency action, even those involving administrative law. See 5 U.S.C. 706. It prescribes no deferential standard for courts to employ in answering those legal questions despite mandating deferential judicial review of agency policy-making and factfinding. See 5 U.S.C. Sections 706(2)(A), (E).
Courts exercising independent judgment in determining the meaning of statutory provisions, consistent with the APA may seek aid from the interpretation of those responsible for implementing particular statutes. 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 to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. According to the holding of the Supreme Court in Loper-Bright, the deference that Chevron requires of courts reviewing agency action cannot be squared with the APA.
Chevron v. NRDC
Chevron, U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) was decided in 1984 by a bare quorum of six Justices. Chevron set forth a deferential judicial approach to federal agency interpretation of law, one which we shall examine in detail. Chevron began as a challenge to EPA rules defining the phrase “stationary source” in the “new source review” program established by the 1977 amendments to the Clean Air Act. See 42 U.S.C.A. Section 7409. The 1977 amendments imposed more stringent air quality requirements on states that had not yet reduced pollution to levels below certain ambient standards in what the statute called nonattainment areas. These provisions required permits “for the construction and operation of new or modified stationary sources” of air pollution. See 42 U.S.C.A. Section 7502. A state could issue a permit for construction of a new or modified major source in a nonattainment area only if the proposed source met these stringent requirements. The EPA initially interpreted “stationary source” to include all individual pieces of pollution-emitting equipment within a plant. The EPA, however, conducted a subsequent rulemaking proceeding, the end result of which was to repeal these earlier rules and to replace them with the so-called “bubble” approach. Under the “bubble” approach, EPA defined a major stationary source as the entire plant rather than the individual facilities within the plant.
On appeal, the D.C. Circuit Court of Appeals overturned the EPA’s new interpretation of “stationary source.” The court found that Congress had no specific intent concerning the term “stationary source,” particularly as it applied to the bubble concept. Nevertheless, the court reversed the agency based on its own interpretation of that term in light of the overall purposes of the amended Clean Air Act.
The Supreme Court reversed the Court of Appeals, and in doing so, appears to have narrowed the range of legal issues in which courts are expected to have the final say. The Supreme Court disagreed with the D.C. Circuit’s willingness to substitute its legal interpretation for that of the federal agency when the statute in question was ambiguous and was being applied to a policy approach to pollution on which Congress provided no express direction. The Supreme Court set forth a two step approach to the review of questions of law:
“If 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 the 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.” See Chevron, 467 U.S. at 843, 104 S.Ct. at 2782.
To uphold the agency’s interpretation, the court need not conclude “that the agency construction was the only one it permissibly could have adopted, or even the reading the court would have reached if the question had arisen in a judicial proceeding.” It need only conclude that the agency’s interpretation was a “permissible” one. Buttressing the Chevron court’s deferential approach to agency interpretations was the fact that certain agencies are connected to an electorally accountable branch of government- the executive. Justice Stevens thus spoke in terms of presidential deference:
“Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges’ personal policy preference. In contrast, an agency to which Congress has delegated policy-making responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration’s views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make much policy choices- resolving the competing interest which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the competing interest which Congress left to be resolved by the agency charged with the administration of the statute in light of everyday realities.” See Chevron, 467 U.S. at 865-66, 104 S.Ct. at 2793.
Chevron’s two step approach to judicial review has clearly changed the “mood” of reviewing courts when dealing with questions of statutory interpretation and to some extent it has changed the law of judicial review of agency interpretation as well. By asking first whether Congress spoke “precisely” to the statutory issue in question, and second, whether or not Congress’ intent was “unambiguously clear” on that issue, the Supreme Court has narrowed the category of issues involving the kinds of questions of law that a court is willing to examine closely, and has expanded the number of agency decisions to which it will defer. If a reviewing court is satisfied that there is no clear congressional intent respecting the precise question at issue, a reasonableness test applies to the agency’s interpretation of the statute involved. As the Chevron court noted, “the court may not substitute its own construction for a reasonable interpretation” by the agency. This is the case, even if the court would have reached a different conclusion in a judicial setting. Reasonableness review usually involves “the agency’s textual analysis (broadly defined, including where appropriate resort to legislative history) and the compatibility of the inquiry with the congressional purpose informing the measure.
Loper-Bright Decision and Its Impact on Administrative Law
In Loper-Bright, the Supreme Court overruled Chevron. Under Chevron’s first step, the Court asked whether Congress spoke to the issue at hand. If yes, the Court followed Congress’ wishes. If the statute was silent or ambitious, under the second step, the Court asked whether the regulation was a “permissible construction” of the statute. Under Cheron, the Court was not to enforce its own view, but instead was supposed to defer to the expertise of the agency that had issued the regulation as long as the regulation was reasonable- commonly referred to as Chevron deference. Now, under Loper-Bright, courts are required to “exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” Under Loper-Bright, questions of statutory interpretation should be answered by judges and not federal agencies.
Will Loper-Bright Have an Impact Tax Litigation Cases?
As discussed above, under Loper-Bright, statutory interpretation should be left to the courts and not federal agencies. The Supreme Court in Loper-Bright identified one exception to this general rule. According to the Supreme Court, when Congress expressly delegates authority to a federal agency, the court’s role is simply to “effectuate the will of Congress.” The Department of Treasury and one of its divisions, the IRS are the federal administrative agencies responsible for overseeing the tax laws promulgated and enacted by Congress. Internal Revenue Code Section 7805 authorizes the Department of Treasury and the IRS to issue regulations to provide guidance in applying new legislation and to address uncertainty that arises with existing Internal Revenue Code provisions. Such regulations are intended to interpret and provide directions on complying with the tax law enacted by Congress. Treasury Regulations are referred to as either legislative or interpretative:
Legislative regulations establish substantive law and are issued pursuant to specific grant of authority from Congress. Normally, when such authority is granted, the statute provides that “the Secretary shall provide such regulations as may be necessary or appropriate to carry out the provisions of this section.” Before the Treasury can issue regulations, the APA requires that certain rulemaking procedures be conducted, such as giving public notice and a period during which the public can comment on the regulation. Interpretative regulations do not establish substantive law. Instead, they clarify previously enacted law. These regulations are issued under the general authority of Section 7805(a) of the Internal Revenue Code, which empowers the Treasury Secretary to “prescribe all needful rules and regulations” to enforce the Internal Revenue Code.
The Department of Treasury and the IRS may argue that Section 7805 makes it clear that Congress wants it to be the primary interpreter of the Internal Revenue Code and the tax law in general. It is clear that even under Loper-Bright, Congress can, in effect, designate a federal agency as a primary interpreter of an area law involved. This does not, however, mean that the agency’s power in this regard is unlimited. It can be overturned, but only if the Secretary exceeded his statutory authority or if the regulation is ‘arbitrary, capricious, or an abuse of discretion, or otherwise not in accordance with the law.” See, e.g., Massachusetts v. Secretary of HHS, 749 F.2d 89 (1st Cir.1984), cert. Denied 472 U.S. 1017, 105 S.Ct. 3478, 87 L.Ed.2d 613 (1985).
Varian Medical Systems Inc. and Subsidiaries v. Commissioner, 163 T.C. No 4 (Aug 26, 2024) was the first option issued by the Tax Court applying the Loper-Bright interpretation of the Income Tax Regulations. At issue in Varian Medical Systems was the application of Internal Revenue Code Section 245A which was enacted by the 2017 Tax Cuts and Jobs Act. Section 245A provides a deduction (“DRD”) for certain dividends received by a U.S. corporation from certain foreign corporations. Given its formulation, the DRD had the potential to interact with Section 78 of the Internal Revenue Code. Section 78 was enacted prior to the 2017 Tax Cuts and Jobs Act. Section 78 provides that for a taxpayer to claim a foreign tax credit, a specified amount “shall be treated for the purpose of this title (other than Internal Revenue Code Section 245) as a dividend received by such domestic corporation from the foreign corporation.” The Tax Cuts and Jobs Act amended Section 78 to provide that amounts treated as dividends under Section 78 do not qualify for the DRD under Section 245A. But in certain circumstances, the Tax Cuts and Jobs Act amendments to Section 78 did not take effect until a tax year starting after Section 245A took effect. This case pointed out that there was a drafting error by Congress regarding the effective dates of the two amendments to the Internal Revenue Code. The Treasury Department attempted to correct and erase the error to the taxpayer’s benefit by issuing Treas. Reg. Section 1.78-1 in 2019 that purported to change one of the effective dates to conform to the other.
Relying on this effective date mismatch, for fiscal year 2018, the Petitioner claimed the DRD for an amount it treated as a dividend under Section 78. The Petitioner argued that it is entitled to the DRD. The Tax Court found that the Petitioner was entitled under Section 245A to a deduction for amounts properly treated as dividends under Section 78 for its 2018 tax year. In this case, the Tax Court unanimously invalidated the regulation on the ground that a plain reading of the two effective date provisions invalidated the Treasury’s regulation. The Tax Court cited the Loper-Bright holding and said it would not defer to the Treasury Regulation Section 1.78-1 because it exceeded Treasury’s rule making authority.
Despite the fact that the Tax Court cited the Loper-Bright decision, Section 1.78-1 was improperly enacted under the Treasury’s rulemaking authority. Thus, the Treasury’s promulgation of Treas. Reg. Section 1.78-1 in regarding the two effective dates was contrary to Congress’s clear intent expressed in the statute. Thus, it is likely that the Petitioner in Varian Medical Systems would have prevailed under the Chevron standard.
Although the Tax Court invoked Loper-Bright for the first time in an opinion, the Court offered little insight into the impact of Loper-Bright on challenges to regulations promulgated by the Department of Treasury or the IRS. Thus, at this point, it is anyone’s guess if Loper-Bright will have any impact on tax controversy cases involving the IRS.
Anthony Diosdi is one of several international tax attorneys at Diosdi & Liu, LLP. As an international tax attorney, Anthony Diosdi provides international tax advice to closely held entities and publicly traded corporations. Anthony Diosdi also represents closely held entities and publicly traded corporations in IRS examinations. Diosdi & Liu, LLP has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

Written By Anthony Diosdi
Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.
