The unique history of tax regulation presents several possibilities for courts.
The U.S. Supreme Court’s June 2024 Loper Bright Enterprises v. Raimondo decision created, in the words of one prominent regulatory scholar, a “legal earthquake.” The case overruled Chevron v. Natural Resources Defense Council, which had granted regulatory agencies the broad latitude to interpret ambiguous statutes when issuing regulations. Under Loper Bright, courts must no longer defer to agency interpretations of ambiguous statutes, and must instead exercise “independent judgment” in interpreting these statutes.
There is no shortage of speculation about how the shockwaves from the Loper Bright earthquake will be felt in the world of tax regulation. But taken together, recent scholarly work and ongoing litigation can help illuminate the potential impact.
According to one scholar, the Internal Revenue Code is the “most complicated set of statutes in the U.S. Code.” It is littered with delegations of authority to the U.S. Department of the Treasury. Some of these delegations are broad in nature and cover a wide swath of the tax code. Most notably, section 7805 provides that the U.S. Secretary of the Treasury “shall prescribe all needful rules and regulations” for the enforcement of Title 26, which generally encompasses the tax code. Tax scholar Reuven S. Avi-Yonah refers to section 7805 as a “general” delegation. Even this provision is broad, it is likely that Congress’ clear grant of discretion to the Treasury Department under section 7805 would enable regulations under the section to emerge unscathed.
Elsewhere, similarly broad authority is provided, but only with respect to specific code provisions. For instance, section 897(l) specifies that the Treasury Secretary “shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.” Avi-Yonah characterizes section 897(l) as a “purpose” delegation. The purpose delegation is operationally similar to the general delegation.
Finally, some code sections delegate narrow authority with respect to a small set of code sections or subsections. Section 305(c) of the code, for example, directs the Secretary to issue regulations governing when and how certain distributions of corporate stock will be taxed as a dividend for the narrow purposes of sections 305 and 301. Avi-Yonah classifies provisions such as section 305(c) as “specific” delegations.
There remains much debate over how courts will treat the various types of agency delegation that appear in the tax code. As one possibility, courts could return to tax exceptionalism, which is the idea that tax is so “different, special, complicated, or important” that it should be treated differently than other administrative actions. For instance, in its 1979 National Muffler v. United States decision, the Supreme Court articulated a multifactor deference test that was stricter than the one Chevron would later present. After Chevron was decided, it remained unclear for years whether National Muffler or Chevron should apply to tax regulations. Finally, in its 2011 Mayo Foundation v. United States decision, the Supreme Court ruled that Chevron should be universally employed, as there was no “justification for applying a less deferential standard of review” for tax regulations than the one applied to other agency regulations. This signaled an apparent death knell for tax exceptionalism.
As tax scholar Andy Grewal recently highlighted, however, the Loper Bright majority spoke “approvingly” of pre-Chevron practices. It is possible that Loper Bright did away with the relaxed Chevron standard, simply returning the law to where it was. In that case, Grewal suggests, perhaps the stricter National Muffler deference standard now passes muster. Grewal ultimately concludes, however, that National Muffler still flies in the face of the “independent judgment” principle espoused by the Loper Bright majority. Grewal also acknowledges that Mayo Foundation, which remains good law, rejected the premise of tax exceptionalism generally.
In the absence of tax exceptionalism, courts will likely turn to the same analytical tools used to assess other agency regulations. Tax experts were quick to notice that the Loper Bright majority signaled that courts should rely on agency interpretations when Congress has “expressly delegated” discretionary authority to an agency. Avi-Yonah argues that general, specific, and purpose delegations all satisfy this standard, as Congress expressly delegated authority to the Treasury Department, and the Treasury Department engaged in “reasoned decision-making.”
Avi-Yonah’s analysis does not end here. As he points out, some conservative justices on the Supreme Court have expressed a desire to revisit the nondelegation doctrine. The nondelegation doctrine holds that while Congress may not transfer exclusively legislative powers to another branch, it can grant an agency discretion to implement and enforce a law if it also articulates an “intelligible principle” to guide and limit the agency. In the case of the tax code, Avi-Yonah predicts, specific delegations would need to be very explicit to withstand scrutiny, most purpose delegations would be rejected as too vague, and general delegations would only hold up if paired with specific delegations.
This uncertainty is illustrated by the ongoing developments in 3M Co. v. Commissioner, now on appeal to the U.S. Court of Appeals for the Eighth Circuit, which is reviewing the U.S. Tax Court’s initial decision in the case. In 2023, the Tax Court had rejected an effort by 3M to invalidate several of the “blocked income regulations” issued under section 482. The court found that, under Chevron, the Treasury Department reasonably interpreted the statute. In light of Loper Bright, the Eighth Circuit ordered supplemental briefing. Unsurprisingly, 3M argued that the challenged regulation was invalid under Loper Bright’s new standard: one header in 3M’s supplemental brief was titled “The IRS’s Responses Effectively Concede that Loper Bright Vitiates the Tax Court Plurality’s Rationale.”
The “statutory pivot” displayed by the government’s supplemental brief is instructive. To be sure, the government still defended the challenged regulation, claiming that sections 482 and 7805 properly delegated authority to the Treasury Department and that the challenged regulation was a “product of reasoned decisionmaking.” But the government chose not to lead with its defense of the Treasury Department’s regulatory authority. Rather, the government opened with the argument that the “best reading” of the “plain text” of section 482, “without resort to the Treasury regulations,” was sufficient to decide the case in its favor.
It is unclear whether the government’s strategy will prevail and whether the Eighth Circuit will decide the case on broad or narrow grounds. In light of the billions of dollars at stake for 3M and other large taxpayers, there is ample motivation for more litigants to challenge more tax regulations. In time, this litigation will likely bring more clarity.
