The recent Tax Court ruling in Varian Medical Systems v. Commissioner could have significant implications for the Treasury Department’s regulatory framework that limits the review capabilities of the IRS Independent Office of Appeals. As discussed by Steve Dixon and Henry Cheng of DLA Piper, these regulations had largely relied upon the now-defunct Chevron doctrine, which allowed deference to agency interpretations of statutory ambiguities.
In 2022, the Treasury proposed measures, specifically Prop. Reg. Section 301.7803-2(c)(19), which currently are pending finalization. This regulation effectively restricts Appeals from considering issues based on invalidity arguments unless a federal court has already issued a decision invalidating the regulation in question. The IRS further issued interim guidance prohibiting Appeals from settling cases on validity challenges unless a court had already ruled the regulations were invalid (AP-08-0922-0011).
From a strategic standpoint, removing Appeals’ role in evaluating these disputes points to a broader issue in tax administration post-Loper Bright. The critics argue that this approach stifles Appeals’ ability to resolve tax disputes without litigation. Historically, such measures might have seemed reasonable within the Chevron context, where promulgated regulations enjoyed a presumption of validity. However, after Loper Bright, the underpinning rationale for these regulations has shifted, showing that this legal paradigm shift has disrupted established IRS protocols.
The court’s decision in Varian Medical concluded that the taxpayer was entitled to deductions under IRC Section 245A and Section 78, contesting IRS and Treasury attempts to legislate otherwise. The court dismissed the IRS’s arguments, emphasizing that the statutes were clear and the taxpayer was rightfully allowed the deduction despite regulatory attempts to the contrary.
This ruling signals a potential reevaluation of how the IRS and Treasury Department might approach tax regulations moving forward. If discrepancies between taxpayer and auditor interpretations of “law” are more pronounced, it could lead to an increase in cases that require litigation for resolution, a move contrary to the role historically filled by Appeals.
Thus, in a post-Loper Bright legal landscape, the Treasury Department may need to revisit these proposed regulations and interim guidance, which could ultimately force more cases into costly and time-consuming litigation.