Supreme Court overturns Chevron decision – Implications for government regulations going forward

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Kasey Pittman

Hi everybody.

We are here today to talk about the historic overturning of the Chevron doctrine. Just to give a little bit of background to linked Supreme Court cases were heard this term Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Chamber of Commerce. These two cases were brought by fishermen who disagreed with a federal regulation that mandated vessel owners cover the cost of federal monitors, who are required to ride their vessels while at sea.

The plaintiffs argued that Chevron v. Natural resources, a ruling that gave federal agencies broad regulatory power, should be overturned.

So just a little background on Chevron. Chevron is a case that was decided in 1984 and the ruling there created by the Supreme Court. The ruling there created precedent that required courts to defer to federal agencies when the law lacked specificity.

So the rationale behind this decision was that federal agencies employ experts and judges should not substitute their general knowledge or assume expertise. So when there was a vague provision, difference would be given to the federal agency who interpreted it. So we're talking about a court case, two court cases rather brought by fisherman.

What does this have to do with tax law?

Well, when Congress passes a law, it generally provides a framework, but not enough details to actually implement the law.

So we look to Treasury to provide guidance that fills in those gaps and gives instructions to taxpayers on how to comply via regulations and the IRS will further provide guidance sub regulatory guidance via a number of mechanisms like revenue rulings, revenue procedures, notices, private letter rulings, FAQs.

So in almost every case, for a law to actually be implemented, treasury needs to step in and provide that guidance.

OK, taking back up under the Chevron doctrine where the law is ambiguous, judges have historically deferred to the IRS as interpretation.

So the question is, how is this going to affect the future of IRS regulations, court cases?

So I want to introduce you today to my friends and coworkers, Ben Willis, who is a director of corporate tax in our Washington National Tax Group, and James Creech, who's a senior manager in our tax controversy group, to talk a little bit more about this decision.

So this Chevron doctrine has been the law of the land based on the Supreme Court ruling for the last 40 years. For four decades, is this new decision retroactive? Will we see judicial decisions that have relied on this doctrine for the last 40 years overturned?

Ben Willis

Very good question, Kasey.

James, did you wanna go first?

James Creech

OK.

I'm kinda curious to hear what you have to say, Ben, I mean my initial mean, the court, the court decision says no, this doesn't overturn anything.

If it relied on Chevron and those decisions still stand, however, this is the new standard, effective immediately for judicial review.

And I think it's important to kind of notate that like it doesn't change how the guidance is probably either, right?

The guidance is still propagated consistent with the APA or the Administrative Procedures Act, which requires notice in common, and it requires reasoned decision making it requires.

Outreach to various stakeholders who can then comment on how the law or how the guidance is supposed to be implemented.

You know any unforeseen consequences?

All that stays the same.

Rather, it's the second guessing at the judicial level that changes and the extent that judges are allowed to second guess what the reason decision making is by the agencies and what are your thoughts on where am I wrong on that one?

Ben

Nowhere.

Not, not that I'm aware of. My friend.

I I'll just say that uh, there's, there's decisions that judges are looking at right now that won't be subject to that limitation that was in the case where it's not retroactive, that they will have to decide next week, you know, under this new body of law that Chevron is is is dead and and have to make the call themselves by not deferring to agencies interpretation, but that that was right on the money.

James

Well, I think that that's one of the things why this is so important is it changes overnight.

How I approach tax controversy?

You know it's no longer is this interpretation, you know?

Does their interpretation match the facts? And how do we distinguish this interpretation with the facts on the ground that I have?

Is their interpretation consistent with the statute?

And if it's not and there's daylight, is there an opportunity to challenge the statute immediately?

Do we not like this and that becomes a you not liking the statute or not liking the interpretation of the statute wasn't enough to get you into a hazards of litigation point for the IRS, but now it may be.

You know, we're having to unlearn everything we learned about difference.

Kasey

Well, and as you guys mentioned before it, it will affect obviously court cases that have not yet been decided and there's a couple I wanna point out.

And there are two cases in particular.

One was a Supreme Court case that that got kicked back down to the lower court.

The decision had previously hinged on the Chevron doctrine and the Supreme Court ordered the lower court to consider this is the whistleblower decision that hinged on this application of a statute that you just threw out and the other is the ongoing FedEx versus the United States case.

Right after the decision came down, the judge directed both parties to submit new briefs within I want to say 2 weeks on how the removal of the Chevron doctrine changed their case.

So we are seeing that play out in in current cases, but it sounds like the more important thing that we're talking about here is the long term long term implications for this case.

And I know that you and I and the three of us have had some really robust discussions about this.

And there were a lot of points to bring up, but let's get into some of the longer term implications that we see related to the issuance of regulations and challenges, court challenges and controversy work.

And so if you guys could speak a little more to that, that would be amazing.

James

Ben you wanna take the lead on this one?

Ben

Sure, I'll. I'll jump out of first with your support.

I can't help but think to myself that my long standing view on Chevron is ohh. It's not that big of a deal, but I think the question that you raised Kasey actually points in the other direction, which is, hey, the cord itself is asking lower courts to reconsider. FedEx is being re-briefed for this specific question.

It's which is, you know, is the analysis gonna changed now while I've been screaming for years now that courts have been ignoring Chevron forever and certainly can.

And so perhaps that won't lead to such a big change.

We can see that there are already changes taking place.

Courts are asking, you know, the parties to reexamine and make sure that data agency deference wasn't being sought or that the Court should be viewing this interpretation at the agency gave, as you know, not meriting agreement by the Court.

And so I do believe that there will be some sizable changes here.

James

Well, and I think there's gonna be sort of two set of changes, ones the affirmative one right ones the kind of where you can actually see the pleadings where you can see the filings, you can see the judicial decisions saying we're gonna go back to something like a skin more difference or we're going to go back to something that's like the Chevron and analysis.

But we're just not gonna call it Chevron.

We're gonna call it something else, because that's just the muscle memory that they have.

I think we also might see a negative change in kind or an absence of change, not negative in terms.

You know, maybe it is both negative in terms of consequences, been negative in terms of absence.

For the IRS, my this might accelerate the prevailing trend where they don't release as much Treasury guidance, they release guidance in IRB level or sub regulatory guidance.

It doesn't even meet the IRB level or Internal Revenue bulletin level guidance.

Because frankly, you know, why are they going to invest the thousands and thousands of hours that treasury regulations entail if they know they're gonna be challenged and you know why we, you know why?

Look at the personnel constraints and say, OK, you know we've got we only have 30 people who can work on this.

There can.

They can't read 40,000 comments that are going to come in because we're going to issue something in a controversial area.

We're just not going to issue anything.

You know, we're gonna.

We're gonna issue FAQs.

We're gonna issue a Rev proc, and then we're gonna litigate because otherwise we know we're gonna mitigate anyway.

And I think it's gonna put the burden back on taxpayers to interpret the law on their own without something that is a very definitive statement of this is what the law is.

And by the way, here's some handy examples and buried in Treasury Regulation XYZ example 4.

Kasey

And so we're talking, I guess, about the potential changes to the to the number of regulations that are issued, but what about the makeup, do you do either of you have any opinions on whether regulations might be more taxpayer favorable going forward, understanding that there may be more successful challenges?

And then let me just throw my follow-up question into that.

Do you think when there are challenges, do you think there will be increased challenges?

And then another fallout question, do you think when people are challenging, they'll be sort of judge and forum shopping for friendly faces here?

And in terms of judges who are more likely to break with agency interpretations, sorry, that was a lot I threw at you.

But there we go.

James

Well, I can just answer with one word.

It's gonna be.

Yes, you know across the board, I mean, I think one of the fascinating things for me, you know, when we look at Chevron and we look at like you were saying, Kasey, the phishing monitors on the boats like in traditional Chevron land that doesn't involve transitory or the IRS, there's a very finite number of stakeholders, right?

Kasey

Right.

James

You know, if you're regulating nuclear power plants, there's only so many nuclear power plants in the country.

There's 330 million Americans plus, you know, all the business returns that are filed.

But there's an awful lot of taxpayers, umm.

And so you just never know where the edge cases are and you never know what people have a bone to pick and you know, uh, you know, in cryptocurrency land, one of our favorite people to kind of talk about are the Jarrettes, who litigated some weird Erie of staking.

Cryptocurrency is equivalent to how harvesting crops and like you just don't know where the plaintiffs are gonna come from or who's backing.

Kind of like the Moores.

And there, $14,000 of of 965 transition tax.

Umm, so yes, I think there's more challenges.

I think there's going to be more of a an emphasis to issue guidance that is perceived as taxpayer favorable or and I think that there's gonna be an incentive to forum shop for people that have a choice of forum of where they can litigate.

Ben

I think one of the things that makes it a favorable for tax to have more taxpayer favorable recommendations.

Ohh, you know these regulations that come out on the side of the taxpayer more often.

It could very well help close the tax gap.

That's an argument I've made before, but that the tax gap generally lies, and the difference between the positions that taxpayers are taking and the law, and the question is, what is the law?

Is it the regulations?

Well, it depends as we were seeing through in this case, it depends on what type of regulation it is, what whether courts give a difference or not.

But in this case, if the IRS does respond to this decision by issuing more taxpayer-favorable regulations, there's less likely to be a big gap between what taxpayers are claiming and what the regulations say.

Now, does that mean in every instance the IRS should know argued that you know a benefit can't be claimed?

No, not necessarily.

It just won't be taking place in what was historically viewed as a much more authoritative law than than what is snap going forward.

Kasey

And we have, we're talking about new regulations, right?

But and that's a good point.

I guess we'll see how that plays out.

Here's a question we have decades of regulations that are existing decades. Do you see taxpayers potentially being willing now that Chevron is gone to take riskier positions, potentially directly contrary to existing regulations, long standing existing regulations?

James

Hey, I don't know.

I mean, I would encourage people not to take those positions.

That's a very aggressive.

Kasey

Well, obviously, yeah.

James

I mean, that's a very aggressive way to go about this.

But I think that, you know, people tend to challenge regulations when they feel they're being unfairly treated by the IRS.

When it becomes about principle, people are much more willing to engage in the kind of litigation required to invalidate a Rick because it's expensive legislative it's expensive, expensive and time consuming.

And it's not something you kind of wake up as a taxpayer who's under audit and say, well, it's Wednesday, I'm going to have black coffee today, my usual toast, and I'll get this Regan validated and move on.

But I think that you know, it's something that certainly consider because one of the corollary cases that we got this term was corner post versus Federal Reserve that and umm that provides standing beyond the normal six year window of what was historically understood as the time frame to challenge APA regulations.

Kasey

I was just about to ask about that.

James

Ohh, which frankly I mean helps resolve one of the really interesting kind of conundrums and tax in terms of you know you need harm, right?

You need to set a showing or standing to get there, and when you have a nuclear, you know a nuclear power plant that gets, you know, millions of dollars of additional burden imposed upon you, you get that harm right away in tax.

You have to wait so long.

You know, for that harm to manifest itself.

Yeah.

And you know, it had some open questions and like, who is supposed to police these regulations?

Are you supposed to rely on nonprofits?

Are you supposed to rely on tax clinics?

Are you supposed to rely on people who might be able to?

Kind of identify issues within the six year statute and be able to litigate them and now we don't have to worry about that, so.

Kasey

Well, so for just a little background right on corner post, the statute of limitations was six years for challenging APA regulations, right?

And it's the case or the decision that came out.

I wanna say July 1st so that the time to be in measuring that those six years are not is not from the time the agency took action, but rather from the time the taxpayer was harmed and so obviously, right, we're talking about you're talking about potential specific instances of harm but additional challenges to just the clear constitutionality in every circumstance of a regulation could be brought by a taxpayer who was deemed to have been harmed anytime, right.

As it didn't, the IRS doesn't have to be coming after you in order.

James

Which I think is really I think is really important because as we look at like we're seeing a lot of audit behavior or a lot of audits in the partnership arena.

And so if we kind of look at where the in taxpayer might be during a partnership audit and you may, you know we may be getting a notice of selection for a you know something that happened two years earlier.

Then it takes two or three years for the audit to wrap up.

There's maybe another year of internal appeals.

There may be time for litigation, but if the if, the partnership's gonna do a push out election that goes on the year of at which the adjustment is made at the partnership level under the partner's return.

So I mean it, it's not gonna be uncommon in the future to have a 2020 tax year being audited and have something show up on an individual partners return in 2027.

And do you just lose that that ability to challenge the regulation that led to the adjustment and now we don't have to worry about that, we can say the harm happened at the time to push out election showed up on the 1040 and they've got standing challenge and the IRS gets less.

Stephens, you know, it's gonna be a while to decide if we get Skidmore or something more, something less.

But we get mussed out.

There's less difference to how the IRS applied the regulation, and now it's fair game.

And so from a tax practitioner standpoint, I have to have less statute of limitation conversations, which is a good thing.

Kasey

That's a good thing.

Kind of a good thing.

Those are sort of my main questions.

Is there anything else?

I feel like Ben or James, that that feels like it's sticks out to you as important for taxpayers to understand and about the application of Chevron and how it affects their tax filing positions going forward.

Ben

I guess I would just add an example to offer what James said a little bit, which is to say, if regulations come out that requires I report something differently in order to not be penalized, for example, I I need a new form that comes out and it doesn't harm me for years after the regulation comes out because I didn't need to report anything under that.

It, it'd be no different than if I was driving down a highway that required me to have an additional form inside of my car in order to avoid getting a penalty.

But it turns out that I this was years later, after the fact, and now the law can't be challenged, even though it was invalid for whatever reason, it was targeting certain drivers.

It was penalizing certain taxpayers who had certain assets that were not intended to be captured by this.

Ohh then you could easily see a situation where someone wants to say, well, isn't my harm what I should be looking at?

Not when the agency issued this regulation requiring the form.

So I I think in many ways this corner post decision is very good for folks who are looking for protection.

James

You know my mean, my thought process after kind of, you know, a week or so of doing on this, umm is I think it's really gonna just really increase the amount or the importance of having thoughtful conversations with clients.

And it's going to require a very significant increase in time, just spent kind of getting updates on the law.

No, because I think that there's a very, very, very real chance that we're gonna have different tax rules in various parts of the country.

And you may have a taxpayer.

Kasey

How split circuits?

James

Well, not even split circuits, right?

You might get down to like there is a District Court in which this is invalid and I don't have to follow it here, but I've gotta follow it here and in addition to the circuit splits and I think it's gonna really increase.

You know, personally and selfishly speaking, it's going to increase the amount of time of reading and updates.

I have to do every day to kind of keep track of where this all goes.

I think there's going to be an evolving standard and how much difference the IRS and Treasury receive.

And I think there's gonna be an evolving standard in how much the APA and applies to sub regulatory guidance, if that's the direction we go.

And it's starting to increase the amount of substantial burden taxpayers based upon a revenue ruling or red proc.

And I think it's really going to require tax professionals to make reasons decisioned in very Gray areas because there's not going to be an easy try to rewrite your point to for this treasury regs at risk.

And you know this district or the Cirque, the circuit.

And what's the rule if this gets invalidated, how are we going to come to the signing position?

And all those have been more or less automatic.

You know it's been a, it's been a fun exercise to make sure you cite the right, you know, circuit courts, debt versus equity rules, even if they're pretty much the same.

Or you kind of have to add one or two here, but it's been largely academic and now I don't think it's gonna be so academic.

I think it's gonna make real challenges to real taxpayers and real dollars.

And if you don't have a CPA or you don't have a tax advisor who's able to help you with that.

You taxpayers may be end up taking risks that they don't know about.

You know, at the end of the day, everybody wants to file a return that's consistent with the law.

As you know, the minimal risk of an adjustment if the IRS decides to second guess it?

And you want to move on with your life.

Nobody really wants this uncertainty hanging out there.

Kasey

Right on.

Any closing thoughts Ben?

Ben

Just that it'll be interesting to see all the aftermath of this decision.

I expect it will affect everybody from Congress all the way down to the field agents and everybody in between on the IRS and government side.

And as far as taxpayers, it's a it's a whole new ball game and I think what will be a lot of questions to deal with.

Kasey

And well, thank you both and thank you everybody for watching.

We'll bring you more updates on this as we get some court decisions post Chevron that are noteworthy and certainly will keep you updated on developments in tax law.

And we look forward to seeing you at our July 11th, 2024, tax trends webinar and yeah more to come as things develop.

But thank you guys.

Thanks for joining.

Ben

Thanks Kasey