The recent ruling by the US Supreme Court in Loper Bright Enterprises v. Raimondo—which effectively ends Chevron deference—signals potential shifts in how tax regulations are challenged and interpreted. Under the Chevron doctrine, courts would side with the Internal Revenue Service (IRS) if its interpretation of a statute was deemed “reasonable.” Now, courts must identify the “best interpretation” of the statute themselves, without automatically deferring to the IRS’s perspective.
While this change does not necessarily alter the way the IRS drafts regulations, it might encourage more taxpayers to challenge unfavorable rulings. Historically, even when interpretations were more favorable to taxpayers, many chose compliance over dispute. However, the heightened “best interpretation” standard could prompt more litigation on significant issues.
The IRS is known for receiving numerous requests for clarification on tax laws each year, and this trend is unlikely to wane with the end of Chevron deference. The recent example of the IRS’s actions following the 2017 Tax Cuts and Jobs Act (TCJA) demonstrates the agency’s proactive stance in issuing comprehensive guidance to clarify new provisions. Despite some regulations being viewed as unfavorable or anti-abuse measures, the appetite for clarity has driven taxpayers to largely accept and adhere to these interpretations.
The ruling in Loper Bright could impact specific ongoing and future guidance projects. For instance, on June 17, the IRS issued proposed rules to prevent perceived misuse of partnership basis adjustments. Such regulations might face substantial challenges, incentivizing taxpayers to contest IRS interpretations, especially when potential benefits are significant.
Similarly, the IRS has issued final regulations on broker reporting requirements for cryptocurrency transactions. With the allowance under the Infrastructure Investment and Jobs Act, these regulations are ripe for dispute given their broad implications and the substantial feedback received from the public.
Ultimately, while Loper Bright provides a stronger basis for disputing adverse IRS regulations, the outcome of such challenges may not be drastically different from rulings under Chevron deference. Recent case law trends indicate courts have been willing to invalidate unfavorable taxpayer regulations based on broader statutory and procedural grounds, independent of deference considerations.
Nevertheless, this ruling could instigate more litigation, compelling the IRS to defend its interpretations more rigorously and sparking a more dynamic landscape for tax regulation challenges. The cases involved in Loper Bright and related judgments like Relentless v. Department of Commerce will offer critical insights into the evolving judicial interpretations in tax law.