This article was updated on July 26, 2024.
Chief Justice John Roberts delivered the 6-3 opinion of the US Supreme Court in Loper Bright Enterprises v. Raimondo, No. 22-451 (slip opinion), overruling the court’s 1984 landmark Chevron decision, on June 28, 2024. This case has garnered significant attention due to its implications for limiting the power of federal agencies in drafting regulations and other agency guidance. It could have implications for your business regarding tax planning and compliance.
In overruling Chevron, the Supreme Court undoubtedly opens the door for an increasing number of taxpayer challenges to the validity and interpretation of US Department of Treasury regulations, potentially leading to significant changes in the tax landscape and controversies for taxpayers.
In addition, another Supreme Court administrative law case decided three days after Loper Bright, Corner Post, Inc. v. Board of Governors, No. 22-1008 (slip opinion), may add to the increasing number of taxpayer challenges by holding that the six-year statute of limitations period in challenging a regulation begins not when the regulation is issued, but rather when the taxpayer is injured which may be decades after the issuance of the regulation.
Ramifications Are Still Unclear
To illustrate the impact of Loper Bright, since the release of the Department of Treasury’s 2021 final section 199A(g) regulations, a controversy has been brewing with agricultural cooperatives. There has been a growing demand from the industry to repeal the Department of Treasury's 2021 final section 199A(g) regulations, which contain rules that are not authorized by the Internal Revenue Code's statutory language.
This prompts the question, will Loper Bright embolden the industry to petition Treasury to kill the section 199A(g) regulations?
In addition, Loper Bright could impact current Treasury guidance evident in proposed regulations. For example, many commentators say the proposed regulations for Excise Tax on Repurchase of Corporate Stock from April 2024 are overly broad and “go beyond the plain language and intent of the statute.” In light of Loper Bright, the Treasury might consider substantially modifying the proposed regulations prior to finalizing them.
Implications for tax professionals and the broader regulatory framework are at a heightened level of uncertainty.
Implications of Loper Bright on Tax Regulations
Although in Mayo Foundation, discussed below, the Supreme Court upheld a Treasury regulation applying Chevron, post Loper Bright taxpayers may now challenge the validity of tax regulations applying the principles of the Administrative Procedures Act of 1946 (APA) without Treasury’s reliance on a Chevron defense.
Loper Bright should also be instructive to Treasury to carefully draft its regulations in accordance with the statutory language of the IRC.
How impactful the overruling of Chevron will be in limiting the power of the Treasury in writing regulations remains to be seen. The Loper Bright decision could foster an industry challenge, resulting in a withdrawal or substantial rewrite, for example, of Treasury’s 2021 Section 199A(g) final regulations applicable to agricultural cooperatives.
These regulations placed restrictions on the extent to which a cooperative’s earnings qualify for the Section 199A(g) domestic production activities deduction, where the statute and legislative history placed no such restrictions. The overruling of Chevron in Loper Bright may provide some impetus for Treasury to revisit its Section 199A(g) regulations applicable to agricultural cooperatives.
Taxpayers may likely be tactical in their approach in deciding on challenging a Treasury regulation. For example, taking into account the political party of the administration in power at the time the regulation was issued, or any influence a taxpayer may have on the selection of a judge who may have a favorable perceived political persuasion to the taxpayer’s position.
However, in Loper Bright 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.”
In addition, Roberts wrote, “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?
Loper Bright Enterprises v. Raimondo
The Supreme Court heard oral arguments on January 17, 2024, in review of consolidated cases from the US Courts of Appeals for the District of Columbia and First Circuits, questioning 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’re required to carry on board, even though the MSA only expressly requires such payment in limited circumstances.
In both cases, 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 Loper Bright, the question before the Supreme Court was limited to whether Chevron should be overruled or clarified, and it held “Chevron is overruled,” writing “At this point, all that remains of Chevron is a decaying husk with bold pretentions.”
Because the Circuit Courts of Appeals relied on Chevron in their decisions, their judgments were vacated, and the cases were remanded back to the Circuit Courts of Appeals for further proceedings consistent with this Supreme Court opinion.
The Supreme Court’s decision in rendering Chevron dead immediately raises significant implications for the extent of federal agencies’ power in drafting regulations.
What Is the Chevron Doctrine?
In 1984, the Supreme Court delivered its landmark decision in Chevron v. Natural Resources Defense Council, Inc., The case established the Chevron doctrine, which outlines a two-step analysis for federal courts when considering challenges to agency interpretations of laws.
The court ruled that if a statute is ambiguous or silent on a particular issue, courts should defer to a federal agency's reasonable interpretation of the statute, as long as it falls within the agency's authority. In Chevron, the court wrote, “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.”
The Chevron doctrine, derived from this case, is a framework for courts to determine the level of deference to be given to federal agency interpretations of statutes. The doctrine's two-step analysis is:
- The court determines whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, the court and the agency must give effect to that intent.
- If the court finds that Congress has not directly addressed the issue, it must determine whether the agency's interpretation is based on a permissible construction of the statute. The court should defer to the agency's interpretation if it is reasonable.
What Did the Court Say in Overruling Chevron? Best is Better than Permissible
In its opinion in Loper Bright, the Supreme Court rejected the two-step analysis mandated in the court’s 1984 Chevron decision, noting its conflict with the Administrative Procedures Act of 1946 (APA).
Effect on Prior Cases that Applied Chevron
Interestingly, the court’s opinion doesn’t specifically affect prior cases, as the decision reads, “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.”
This means for example, the Supreme Court’s decision in Mayo Foundation for Medical Education and Research v. United States, discussed below, can’t be relitigated to change the outcome of its holding, barring a change in legislation.
What the Loper Bright Decision Says
In part, the decision reads, “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,’” citing United States v. Morton Salt.
“The APA delineates the basic contours of judicial review of such action. As relevant here, 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…not in accordance with law’ §706(2)(A).”
“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—as they have from the start —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.”
“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 ‘heedless of the original design’ of the APA. Perez, 575 US, at 109 (Scalia, J., concurring in judgment).”
In Overruling Chevron
“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.”
Other Applications of the Chevron Doctrine
Various applications of the Chevron doctrine have shaped the deference given to federal agencies' interpretations of statutes. An example case in the tax context is Mayo Foundation.
Mayo Foundation for Medical Education and Research v. United States
This 2011 case 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 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 section 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’s regulations administrating this section of the IRC provide 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”. 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, a Mayo medical resident is not an exempt student under IRC section 3121(b)(10).
The Supreme Court concluded that the principles underlying Chevron apply in the tax context and that the Treasury's regulation, which denied the exemption, was a reasonable interpretation of the statute.
In Loper Bright the court held that “cases that relied on the Chevron framework” such as Mayo Foundation remain precedent to be followed by the courts.
Statute of Limitations in Challenging a Regulation
On July 1, 2024, Associate Justice Amy Barrett delivered the 6–3 opinion of the Supreme Court in Corner Post, Inc. v. Board of Governors, No. 22-1008 (slip opinion) resolving a split in the circuits as to when an APA claim accrues for purposes of the six-year statute of limitations.
28 USC Section 2401(a) (United States as Party) provides that “every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues.” In Corner Post, the petitioner, a truck stop and convenience store, opened for business in 2018. It became frustrated by the interchange fees it was paying, and in 2021, brought a challenge against a regulation that was issued in 2011 alleging that the regulation “is unlawful because it allows payment networks to charge higher [interchange] fees than the statute permits.”
The court held that “An APA claim does not accrue for purposes of Section 2401(a)’s 6-year statute of limitations until the plaintiff is injured by final agency action. Because Corner Post filed suit within six years of its injury, Section 2401(a) did not bar its challenge to [the regulation].”
As a result of the court’s decision in Corner Post, a challenge to a regulation subject to the six-year statute of limitations of Section 2401(a) may be brought more than six years after the regulation was issued.
The key is that suit must be brought within six years of the injury to the plaintiff or taxpayer.
We’re Here to Help
For more guidance on the effects of the Loper Bright case or help navigating changes to Treasury regulations, contact your Moss Adams professional.