Supreme Court Rulings Alter the Future of Tax Regulations

“Supreme Court Rulings Alter the Future of Tax Regulations,” that is the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is ACTEC Fellow Margaret Van Houten of West Des Moines, Iowa.

This year, the U.S. Supreme Court issued its decisions in two significant planning cases: Loper Bright Enterprises v. Raimondo, and Corner Post, Inc. v. Board of Governors the Federal Reserve System. These two cases have meaningfully shifted the landscape of federal regulations, including those from the Treasury. The benefit of the doubt embedded in the Chevron case (Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.) is gone – we need to know what is in its place. Also, the tolling of the statute of limitations to challenge a regulation received a very friendly reception by the court. Combined, these result in a new approach to challenging a regulation, including introducing the strategy of forum shopping.

ACTEC Fellow Mark R. Parthemer of West Palm Beach, Florida, and guest Jenny Johnson of Chicago, will share their thoughts on these important rulings. Welcome, Mark and Jenny.

Why don’t you start with “Where are we now?” regarding the standard of review by a court?

Update on Standard Reviews by a Court

Mark R. Parthemer: Thank you, Margaret. And Jenny, it’s a pleasure to be working with you again on this matter. We’re going to be talking today about these cases, starting with Loper (Loper Bright Enterprises v. Raimondo) that dealt with the Administrative Procedures Act (APA). Remember, that act was put into place in the 1940s that provided a structure and framework for a regulation can have the force and effect of law. The question then becomes, within the APA, how do we challenge?

We had a Chevron deference, as we know. So what we had is a 1944 case, Skidmore (Skidmore v. Swift & Co.), that provided the standard of review. Then 40 years later, 1984, a Chevron case was held that created a deference that if a two-prong test was met then the regulation would be deemed valid. The two-prong test, first, is the statute ambiguous on the precise question at issue? And second, if so, is the agency’s interpretation reasonable? And if the answer to those questions are “yes” and “yes,” a court would defer to the regulation.

That was 40 years after Skidmore in 1984, and now we are 40 years later and Chevron is gone.

Current Status of Chevron Deference

Jenny, why don’t you lead us through some of the context of the decision?

Jenny Johnson: Sure, so in the Loper Bright decision, the Supreme Court held that the APA requires courts to say what the law is, not agencies. And that courts, not agencies, are experts in statutory interpretation.

Whereas Chevron deference said if the agency’s interpretation was permissible, the courts would defer to that interpretation. Now, the courts will not defer under the theory that if it’s not the best interpretation, it’s not permissible, and courts have to decide what is the best interpretation.

They found that there should be no implied delegations to agencies. And instead, would be looking for an express delegation by Congress to an agency, if there was going to be any deference by the courts to the agency’s interpretation. And without that express delegation, they rewound back to Skidmore, as Mark started with in the beginning, with something that is really – it looks to agencies for guidance – but there’s really truly no deference under that standard.

Mark, why don’t you go ahead with next step?

An Overview of Skidmore v. Swift & Co.

Mark R. Parthemer: Absolutely, thank you, Jenny. So where are we now? I think that’s the question of the day. And with Skidmore, we really have two different levels of review. Those levels are dependent upon whether there was an express delegation by Congress to interpret the statute.

So, does the law that passed expressly delegate the authority to establish regulations under that statute? If so, then as long as the notice and comment procedures are followed, that regulation is going to be upheld unless it is deemed to be capricious. So express delegation in the statute; very high standard.

If there’s no express delegation, we’re following under just the general authority of Treasury or whichever agencies are involved, then we’re back to Skidmore. As you mentioned, Jenny, Skidmore isn’t really a deference. What Skidmore basically provides is that a court will take into consideration an agency’s rulings, opinions, and interpretations. They’re not binding on the court, they are used to reflect the experience of the agency and can be viewed by the courts and litigants for that purpose, for guidance only. But the court will then decide in and of itself whether or regulation is appropriate. This shouldn’t be a surprise.

If we have a little context here, we’ve seen the same sort of expansion and contraction of authority as it relates to an agency’s interpretation of its own regulations. We had the Seminole Rock (Bowles v. Seminole Rock & Sand Co.) and Auer cases (Auer v. Robbins), from years ago, starting in 1945, that similarly had a deference standard built into it. And then as we move forward, and Kisor (Kisor v. Wilkie) in 2019, the Supreme Court narrowed that Auer, then some of the Seminole Rock, standard as it relates to those interpretations.

So we’re seeing a parallel now going on to the issuance of a regulation very similar to what we’ve seen on an agency’s interpretation of its own regulations. So not a surprise.

Varian v. Commissioner

Now, there was a lot of notoriety about a case that came out subsequent to Loper Bright called Varian v. Commissioner. It was the first sort of post-Loper case. And I think it’s probably been given a little more emphasis than it needs to because if we think about what happened in Varian – in which a regulation was overturned – it would have been also at issue even under Chevron deference.

This dealt with a 2017 Tax Act, in which there were two different designations as to when a particular Code section was going to be applicable. And so, the IRS issued a regulation that said: well, this doesn’t work for certain fiscal year corporations, therefore, we’re going to publish a regulation that says you’re going to use the effective date of the other Code section. And the court said: well, you can’t do that by regulation, but there was no ambiguity. So, it wouldn’t have fallen under Chevron anyway. The statute was very clear. Code section (a) had an effective date of January 1. Code section (b) had an effective date of July 1. And so there was no ambiguity there.

We’ve seen now we’re back to where courts are not going to abandon their review. They’re really going to look at things and they’ll just take into consideration the body of evidence by the issuing agency. So, that’s where we stand now with Loper, but we also had Corner Post. And Jenny, let me turn back to you to talk a little bit about Corner Post.

Corner Post, Inc. v. Board of Governors of the Federal Reserve System

Jenny Johnson: We’re going to switch gears from the substantive standard of review to a more procedural aspect of administrative law with Corner Post. Because, in Corner Post, the court said that the default statute of limitations in 28 U.S. Code 2401 (a) – which is a six-year statute of limitations for any civil action commenced against the United States – does not accrue and start running until an individual who’s seeking to challenge or the entity who’s seeking to challenge, is actually injured. The government wanted that statute to start running when the regulation was published, and instead, the court said: nope, it only starts running when the individual who’s coming to court to challenge it has a cause of action that they can bring to a court, and that’s when that six-year time limit starts.

Now for taxpayers, you might say: well, what does this mean to us? Because there are very strict limitations for when we need to bring some type of cause of action challenging the application of a regulation to a taxpayer. And, while on the substantive side, most people would agree that tax exceptionalism is relatively dead; here on the procedural side, that’s really not true, because there’s another statute – the Anti-Injunction Act – that bars any suit for the purpose of restraining the assessment or collection of any tax, and that’s in Code Section 7421(a).

With that bar on pre-enforcement review of a tax, it’s much more difficult for any taxpayer to bring an affirmative action challenging a regulation prior to having that regulation applied against them in a deficiency action from the IRS. And there are very strict time limits for challenging a deficiency. So what this boils down to for taxpayers is that you still have to follow all these same old rules about when you would file a petition in the Tax Court or how and when you would file a claim for refund. And now this just confirms that if you file your claim for refund – your administrative claim – and the IRS ignores it and doesn’t do anything with it, really from six months after that, you have six years to go to court and file your action. There’s a limitation on when you can continue pursuing that claim for refund.

And then there’s a whole section of potential challenges to the regulations that came up in some other cases recently. CIC Services (CIC Services, LLC v. Internal Revenue Service) is one of them. Where if there’s an information reporting requirement that is separate and apart from any tax, that can be challenged in a direct action under the APA. And that statute of limitations with the six years is probably going to start running whenever the person who wants to challenge the regulation is injured by it, meaning they have to expend resources to comply with the information reporting requirements.

Best Practice Takeaways Regarding Tax Regulations

Jenny Johnson: So that sets us up for three different ways to potentially challenge regulations. But I see that we’re getting very short on time, so we should talk about one quick best practices point. Which is that venue is going to become very important. Because in Loper Bright, the court was very explicit that they see no reason to presume that Congress prefers uniformity for uniformity’s sake over the correct interpretation of the laws. So I think we’re going to see a lot more variance across the country in terms of different circuits interpreting the laws in different ways. And, as you’re doing your planning, you’re going to want to be thinking about putting your trust or the taxpayers who are going to be challenging certain regulations in the circuits that are going to be most advantageous to them.

Mark R. Parthemer: I think that’s fascinating – it’s going to be a very interesting development, Jenny. I think also we’re likely to see issuing agencies like the IRS, when issuing a regulation, to have a more expansive explanation in regulations to build a better file to protect against a tax. And I suspect we might also see some agencies looking to do other avenues – to take other avenues – for alerting; say, taxpayers through things like rulings and notices and Chief Counsel Advisory releases, like we’ve seen of late. So it’s going to be fascinating as this plays out over the next number of years. And appreciate the opportunity to speak on it. And good luck, everyone.

Margaret Van Houten: Thank you, Mark and Jenny, for informing us about these significant changes in how judicial review of federal regulations will be looking like in the future. Thank you.

Additional Resources

• Tips for Preparing a Federal Estate Tax Return (Mar 2024)
• Follow Up on the 2017 Tax Cuts and Jobs Act (Dec 2018)

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