Is the US Supreme Court fishing for a way to upend decades of judicial deference to tax rules issued by the IRS and Treasury? The Justices have taken a case, called Loper Bright Enterprises v. Raimondo, that will give them the opportunity to reverse the standards the High Court itself created in a landmark 1984 case called Chevron U.S.A., Inc. v. NRDC.
The case has received relatively little attention in the tax world, which is more focused on another lawsuit the Court will hear this year, Moore v. the United States. That case directly challenges Congress’s ability to tax undistributed corporate earnings and could have enormous consequences for the entire revenue code.
But while Loper Bright has nothing directly to do with taxes, the Court’s decision in that case could significantly limit the ability of the IRS and Treasury to fill in the blanks that Congress nearly always leaves when it writes, or rewrites, tax law. The Court is expected to hear oral arguments this Fall.
A Chance To Limit Rulemaking
Loper Bright involves a dispute over regulation of commercial fishing boats. But many conservative advocates (here and here) see it as an opportunity for the Supreme Court to vastly expand on its recent, incremental efforts to limit executive branch authority.
Reversing Chevron would take a huge bite out of federal rulemaking authority. And it would have “really significant implications” for Treasury and IRS, Loyola University law professor emirita Ellen Aprill told me.
The 40-year old Chevron doctrine says judges generally should defer to federal agencies when Congress delegates rule-writing authority to the regulators and as long as their interpretation of a statute is “reasonable.”
Of course, “reasonable” is open to broad interpretation. But the overarching idea is that courts should recognize the expertise of regulatory agencies when statutes are ambiguous. In a friend of the court brief, law professors Kent Barnett and Christopher Walker called Chevron “bedrock precedent” that has been cited in 17,000 court decisions.
This flexibility is especially important for tax law. Congress frequently leaves it to Treasury and IRS to fill in the blanks, either because taxes are so complex or because lawmakers cannot agree on how to address a specific issue. Indeed, lawmakers often leave implementation of tax law to the IRS and Treasury because they know they can, thanks in large part to Chevron.
If the justices reverse Chevron, Treasury and IRS likely would be guided by older opinions, including the 1979 Supreme Court decision in National Muffler Dealers Association v. United States. But National Muffler gives judges more flexibility to determine when to review tax regulations. And, argues Aprill in a recent article, “the results of its application are uncertain.” She concludes: “Sometimes deference figures prominently, sometimes hardly at all.”
The Supreme Court has been trimming regulatory authority since the beginning of the century. And today’s conservative majority has adopted a new theory, called the “major questions” doctrine, that asserts some issues are so significant that they can’t be left to mere regulators, even if Congress explicitly gives them broad authority to write rules.
The Chevron ruling will come at a time when the IRS has been getting significant pushback from courts. In several recent cases, judges have reversed IRS guidance because they said the agency did not first go through the rigorous notice-and-comment procedures required for full-blown regulations.
Loyola’s Aprill says the agencies may need to ask for public comments more often as a way to strengthen their case for “reasonableness.” But even by doing that, their authority to write regulations without being second-guessed by judges would be much less clear without Chevron.
It is not possible to predict how the justices will rule in Loper Bright, of course. If they limit their decision to the narrow facts in the fishing boat case, tax regulation could be little changed. But if they use the case to gut or even reverse Chevron, tax administration, and tax legislation, could look very different in coming years.
Treasury and IRS still would retain authority to write regulations, especially for new law, without constant judicial intervention. But without Chevron’s judicial guardrails, regulators would have far less flexibility to address changing circumstances. For example, would they still be able to write tax rules that apply to cryptocurrency, which is evolving far more rapidly than Congress can respond?
Impact on Congress and Taxpayers
How would a Chevron-less world affect legislation? These days, tax law often is written at the last minute by non-experts gathered in a backroom. The opportunities for mistakes or policy gaps are enormous. And in today’s hyper-partisan environment Congress often can’t act at all to fill in crucial details.
The result: Key administrative questions are left unanswered.
Repealing Chevron would build on the Court’s recent enthusiasm for weakening executive branch power. But it may upend the way Congress writes tax law, create a real mess for Treasury and the IRS, and complicate life for taxpayers who crave post-legislative clarity.