U.S. Supreme Court ends Chevron-level deference to agency interpretation of law

ARTICLE | July 10, 2024

Authored by RSM US LLP

Executive Summary

In the landmark Supreme Court case Loper Bright Enterprises v. Raimondo,¹ the Court tackled a long-standing legal doctrine known as Chevron deference. This doctrine, established in 1984, required courts to defer to federal agencies' interpretations of ambiguous statutes they administer, even if the court had a different interpretation. The Loper Bright decision overturned Chevron, marking a significant shift in administrative law and the balance of power between the courts and federal agencies.

Given the amount of official guidance issued by Treasury and the IRS interpreting the Internal Revenue Code (the Code), the end of Chevron deference raises questions about the potential impact on the operation of U.S. federal (Federal) tax law.

Possible Impact in the Area of Tax

The Loper Bright decision is a landmark ruling with far-reaching implications for administrative law. The Court has empowered the judiciary to play a more active role in interpreting statutes and challenging an agency’s interpretation of a statute. The decision is also significant for businesses and regulated entities. By removing the presumption of deference to agency interpretations, the decision could make it easier for businesses to challenge agency rules and interpretations in court. This could lead to greater legal uncertainty in the short term, as courts grapple with their new role in statutory interpretation.

How might the end of Chevron deference affect the administration of Federal tax law? There are several points worthy of note. As an initial matter, tax regulations often provide greater clarity to taxpayers than the Code does alone. Without regulations that set forth how taxpayers (and the IRS) must interpret the Code, businesses and investors could find it more complicated to engage in a transaction with potentially significant Federal tax consequences.

Absent Chevron deference from courts, consider the effect on the amount and kind of guidance issued by Treasury and the IRS. One approach could be for the IRS to rely more on non-precedential or “sub-regulatory” guidance to provide greater certainty, such as revenue procedures, revenue rulings and other announcements.

Further, the IRS could reduce the amount of official guidance and turn to a strategy of deterrence (e.g., requiring disclosure of transactions it considers questionable). Given its broad latitude to require disclosures in tax filings, this practice could serve as a way of signaling to taxpayers its disapproval of certain transactions or positions.

Lastly, note the extent to which Congress specifically delegates authority to Treasury to write regulations in a given area of the Code. A good example of this is the consolidated return rules under section 1502. In that provision, Congress granted Treasury broad authority to write regulations governing affiliated groups that elect to file a consolidated return, and that one provision has produced myriad complex rules governing consolidated groups and their members.² As discussed below, a court’s role in reviewing regulations written under delegated authority is to ensure the agency has engaged in reasoned decision making and respected the boundaries of its authority. A court will likely apply less scrutiny in this situation than to a regulation that merely interprets an ambiguity or fills in gaps where a statute is silent. Given Congress’s tendency to delegate authority to the Treasury to write regulations, the end of Chevron deference may have less severe implications on the administration of Federal tax law than it would appear on cursory examination. In future amendments to the Code, Congress might also increase its practice of delegating authority to Treasury to address a tax issue.

Overview of Chevron deference

The Chevron decision required courts to use a two-step framework to interpret statutes administered by federal agencies:

• First, the reviewing court assessed whether, through the statute, Congress directly spoke to the question at issue. If Congress’s intent was clear, the inquiry was over, and the agency’s interpretation must conform itself accordingly.
• Second, if the reviewing court determines the statute is silent or ambiguous regarding the issue, it must defer to the agency’s interpretation if it is based on a “permissible” construction of the statute.³

Prior to the Supreme Court’s Loper Bright holding, therefore, federal agencies were given significant latitude to interpret statutes that were ambiguous or silent on a given issue. This deference extended to regulations issued by the Treasury and IRS that interpreted a given provision in the Code. In overruling Chevron, the Court indicated that it was not calling into question the holdings of prior cases that relied on the Chevron framework.

Loper Bright Enterprises v. Raimondo

The Loper Bright case originated from a dispute over a rule issued by the National Marine Fisheries Service (NMFS) under the Magnuson-Stevens Act (MSA). The MSA governs fishery conservation and management in federal waters. The disputed rule required certain fishing vessels in the Atlantic herring fishery to carry and pay for government-certified observers on board to collect data.

The fishing companies, Loper Bright Enterprises and others, challenged the rule, arguing that the MSA did not authorize NMFS to impose these costs on them. The lower courts, applying Chevron, sided with the government, concluding that the statute was ambiguous and the agency's interpretation was permissible.

The Court, in a 6-3 decision, sided with the fishing companies and overruled Chevron. The Court held that the APA requires courts to exercise their independent judgment in interpreting statutes, even when they are ambiguous. The Court emphasized that the judiciary's role is to say what the law is, and that Chevron deference had improperly shifted this responsibility to agencies.

The Court's decision was based on several key arguments. First, it argued that Chevron deference was inconsistent with the text and structure of the APA, which gives courts the authority to decide all relevant questions of law. Second, the Court argued that Chevron deference was not necessary to ensure expertise in statutory interpretation, as courts are capable of understanding complex regulatory issues and can rely on agency expertise when needed. Finally, the Court argued that the judiciary’s application of Chevron deference was inconsistent, making the doctrine unworkable.

In addition, the Court acknowledged situations in which a statute delegates discretionary authority to an agency to write a rule. In those cases, it stated that the role of a reviewing court is to recognize constitutional delegations of authority, fix the boundaries of that delegated authority, and ensure the agency has engaged in “reasoned decisionmaking” within those boundaries. As discussed, there are myriad places in the Code where Congress specifically delegates authority to Treasury to write a rule. The Court also noted that Loper would not apply retroactively, meaning that issues of agency interpretation that have already been litigated are still good law despite reliance on the Chevron doctrine.

Summary

The Loper Bright decision is a major development in administrative law that will likely have a lasting impact on the relationship between the courts and federal agencies. It remains to be seen how this decision will play out in practice with Treasury and the IRS. Keeping in mind the broad points discussed above, companies and tax advisers should closely observe how Treasury and the IRS as well as the courts respond to the end of Chevron deference.

[1] 603 U.S. __, No. 22-451 (2024).

[2] See Reg. sections 1.1502-1 to -96.

[3] Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).