Earlier this year, the U.S. Supreme Court decided a case dealing with the arcane subject of administrative law that has left lawyers in a tizzy.
The ruling overturned the long-standing “Chevron doctrine,” which required courts to defer to a government agency’s (such as the IRS’s) interpretation of ambiguous federal statutes.
The case will alter the way courts deal with legal challenges to IRS regulations and will likely weaken the IRS.
A Little Background: The Chevron Doctrine
When Congress enacts laws, it typically delegates authority to the federal agencies that enforce those laws so they can adopt administrative regulations that interpret ambiguous provisions or fill in administrative gaps.
After all, Congress can’t think of everything when it writes a law—especially a tax law.
Over the years, the IRS has enacted so many regulations that they dwarf the tax code: the tax code is about 2,600 pages long, while all the regulations written by the IRS amount to over 16,000 pages.
Administrative regulations written by the IRS and other federal agencies are not the same as laws passed by Congress. If these regulations are challenged in court by affected citizens, how seriously should the courts take them? Until recently, the answer has been “very seriously.”
In 1984, the U.S. Supreme Court established a deference test for courts when reviewing federal regulations.1 Under what came to be known as the Chevron doctrine, courts were required to defer to a federal agency’s interpretation (also called “Chevron deference”) whenever federal legislation is ambiguous or leaves an administrative gap, so long as the relevant court determined that the agency’s interpretation was reasonable.
Under the Chevron doctrine, therefore, it made no difference if a court thought there was a better interpretation of a federal statute than the one adopted by the federal agency when creating a regulation. So long as the agency’s interpretation was not unreasonable, it would not be struck down.
The rationale for the Chevron doctrine was that the courts should defer to federal agencies’ expertise when it came to administrative rulemaking.
Generally, courts applied the Chevron doctrine only to final agency regulations adopted after public notice and comment, but not to other types of sub-regulatory guidance.
Chevron involved environmental regulations, and it was unclear whether the doctrine also applied to IRS regulations. But in 2011 the Supreme Court, in its Mayo decision, finally held that Chevron applied to interpretive tax regulations issued under IRC Section 7805(a), which gives a general grant of authority to the Treasury Department to “prescribe all needful rules and regulations for . . . enforcement” of the tax code.2
The Chevron doctrine, combined with the Mayo decision, made it very difficult to successfully challenge IRS regulations in court. In effect, IRS regulations were given the full force and weight of law.
Chevron Doctrine Overruled
In 2024, the Supreme Court overturned the Chevron doctrine in a case called Loper Bright Enterprises v Raimondo.3
The case involved National Marine Fisheries Service regulations requiring Atlantic herring fishermen to pay for a fish monitoring program. The Supreme Court held 6-3 that it was up to the courts, not federal agencies, to interpret statutes passed by Congress.
Thus, regulations enacted by the IRS and other federal agencies will no longer be given automatic deference. Instead, the courts will employ traditional tools of statutory interpretation to determine the best interpretation of a statute, regardless of whether the statute is ambiguous or what the IRS’s (or any other agency’s) views are.
Many legal experts view this decision as an extraordinary expansion of the power of the federal courts at the expense of the “administrative state.”
Overruling of Chevron Not Retroactive
Chevron has been cited in thousands of cases since 1984 to uphold government regulations. Overruling it could have caused chaos.
The Supreme Court avoided this by holding that its Loper Bright decision does not overturn prior Chevron deference rulings. But the ruling opens the door to challenge existing regulations. Further, there are few Chevron deference rulings in the tax law arena.
IRS Regulations Are Still Entitled to Some Judicial Deference
IRS regulations (and other government agency regulations) are still given some weight by courts—what lawyers call “Skidmore deference.” Under this rule, courts do not automatically accept an agency’s interpretation of a law as binding. Instead, the weight they give to it depends on various factors, including whether
- the agency’s interpretation is persuasive, compelling, and well-reasoned;
- the agency has been consistent in its interpretation over time; and
- the agency has specialized knowledge in the area of law or policy.
This is a far cry from Chevron deference.
Some provisions of the tax code include a specific delegation of authority by Congress to the IRS to enact regulations. For example, IRC Code Section 6418(h)5 (dealing with the transfer of green energy tax credits for cash) directs the Treasury Department to issue regulations or guidance “as may be necessary to carry out the purposes of IRC Section 6418.”
Regulations enacted by the IRS under such authority are entitled to greater deference. The Supreme Court ruled that in these instances, courts must limit their review to6
- assessing the delegation’s constitutionality,
- confirming that the agency acted within the scope of the delegation, and
- determining whether the agency followed a reasoned process when issuing the regulations.
Legal challenges to these types of regulations may be less likely to succeed.
How Does Loper Bright Impact Taxpayers?
Loper Bright’s impact on taxpayers will play out over many years. Here are some possible ramifications.
More Challenges to IRS Regulations
There will be more legal challenges to IRS regulations. Many are already underway.
For example, there are multiple, ongoing legal challenges to IRS regulations issued over the past five years involving the Tax Cuts and Jobs Act. Regulations involving green energy adopted under the Inflation Reduction Act may also be subject to challenges as a result of Loper Bright.
The IRS’s new cryptocurrency regulations will certainly be subject to numerous legal challenges.
Older IRS regulations are also now subject to challenge. These will be aided by another U.S. Supreme Court decision issued a few days after Loper Bright, holding that the Administrative Procedure Act’s six-year statute of limitations for challenging a regulation doesn’t start when a regulation is published, but instead when the person or entity bringing the legal challenge was first affected by the regulation.
This means decades-old regulations can now be challenged in court.
Less Tax Uniformity
Due to Chevron deference, IRS regulations were rarely invalidated and were applied uniformly throughout the country. Now, multiple court challenges to the same regulation in different parts of the country could lead to the regulation being struck down by one federal court and upheld by another.
For example, a regulation could be upheld by a federal court in Florida and remain in effect in that state, but could be invalidated by a court in California. The Supreme Court is supposed to resolve such conflicts among the federal courts, but this is a time-consuming process. This could cause much uncertainty and confusion.
Fewer Regulations
The IRS may decide to enact fewer regulations and rely more on sub-regulatory guidance such as revenue rulings and procedures, notices, and FAQs. Such guidance was never entitled to Chevron deference—it is entitled to Skidmore deference, just as regulations are now after the Loper Bright decision. Why go to the trouble of enacting regulations when the courts can easily overturn them?
Inability of the IRS to Avoid Court-Adverse Decisions through Regulation
The Chevron doctrine gave the IRS enormous power to effectively overturn court decisions through regulation. If the IRS lost on an issue in court, it could adopt a contrary position through a new regulation, which the courts would have to abide by due to Chevron. This practice is now over.
Regulations Becoming More Taxpayer-Friendly
The Chevron doctrine emboldened the IRS to write regulations that furthered its goal to increase tax collections, but that did not necessarily represent the best reading of the tax laws passed by Congress. With the demise of Chevron, the IRS will need to be more restrained to avoid having its regulations struck down by the courts.
IRS More Likely to Settle Cases Involving Regulations
The IRS has had a long-standing internal policy that it will not administratively settle disputes with taxpayers based on challenges to the validity of IRS regulations. This could now change. The IRS may prefer to settle such disputes rather than take its chances in court.
Takeaways
Here are four takeaways from this article.
