While many others look to see how tax regulations will be addressed by courts going forward based on the recent Supreme Court decision, Loper Bright Enterprises v. Raimondo, 2024 U.S. LEXIS 2882 (June 28, 2024), let’s focus on the impact of this decision (yet another overruling of Supreme Court precedent) on past court cases that have applied Chevron deference.

Before we discuss Loper Bright, let’s start with two maxims: (1) language is difficult; and (2) Congress cannot legislate quickly or precisely enough to keep pace with society’s need for rules to properly function. Agencies step in (we hope quickly and with reasonable interpretations) to fill the gaps left in statutory text. Courts, then, stepped in to provide clarification on how we should view the role of agencies where the text of statutes and agency’s guidance present ambiguity. In Chevron, USA, Inc. v. NRDC, 467 U.S. 837 (1984), the Supreme Court ruled that as long as an agency’s interpretation was a permissible construction of a statute that was either silent on a specific issue or ambiguous, courts must defer—that is, give the right of way—to an agency’s interpretation (aka “Chevron deference”). In Auer v. Robbins, 519 U.S. 452 (1997), the Supreme Court held that courts must defer to an agency’s reasonable reading of its own genuinely ambiguous regulations, e.g., the agency that poorly drafted the guidance is in the “better position to reconstruct its original meaning” than judges, who are “most likely to come to divergent conclusions when they are least likely to know what they are doing” (aka “Auer deference”). In Kisor v. Wilkie, 139 S. Ct. 2400 (2019), the Supreme Court refused to overrule Auer deference although it did narrow its application. But, just five years later in Loper Bright, the Supreme Court completely abandoned Chevron deference. Confused by the Supreme Court’s mixed signals here? You’re not alone.

What happened in Loper Bright? In Loper Bright, the Supreme Court ruled that “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and may no longer defer to an agency interpretation of the law simply because a statute is ambiguous.

What, then, is the effect of Loper Bright to prior court decisions that applied Chevron deference? In various decisions, courts have validated Treasury regulations by applying Chevron. See, e.g., SIH Partners LLLP v. Comm’r, 150 T.C. 28, (2018), aff’d, 923 F.3d 296 (3^rd Cir. 2019), cert. denied, 2020 U.S. LEXIS 140 (2020) (applying Chevron deference to uphold Treasury regulations under I.R.C. § 956 related to controlled foreign corporations). Given that the fundamental reasoning applied by many courts relied on Chevron deference, the question is whether the force and effect of these regulations are open to challenge, again, as a result of Loper Bright?

Although the Supreme Court overruled Chevron, it tossed a thin lifeline to past cases decided based on Chevron deference to mitigate the likely jolt to the legal system of yet another instance of the Court rejecting its own case law:

“[W]e do not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful . . . are still subject to statutory stare decisis despite our change in interpretive methodology. See CBOCS West, Inc. v. Humphries, 553 U. S. 442, 457 (2008). Mere reliance on Chevron cannot constitute a “special justification” for overruling such a holding.”

In her dissenting opinion, Justice Kagan snickered at the majority’s effort to minimize the chaos resulting from the Loper Bright decision to prior cases which were decided using Chevron stating:

“Courts motivated to overrule an old Chevron-based decision can always come up with something to label a “special justification.” Maybe a court will say “the quality of [the precedent’s] reasoning” was poor. Ante, at 29. Or maybe the court will discover something “unworkable” in the decision—like some exception that has to be applied. Ante, at 30. All a court need do is look to today’s opinion to see how it is done.”

The ripple effect from the Loper Bright decision impacts prior cases that applied Chevron and Auer deference.

Where does Loper Bright leave tax professionals looking at a case such as SIH Partners? If you find a Treasury regulation that presents your clients with a problem, then, based on Justice Kagan’s dissenting opinion in Loper Bright, the lifeline keeping aloft any prior cases that validated these regulations looks terribly weak despite the majority opinion’s statement that stare decisis continues to apply to these cases. Likewise, there appears to be nothing left to argue Auer deference for agency interpretations of its own ambiguous regulations.

While everyone recognizes that Congress cannot keep pace with rapidly evolving issues with legislation, with its decision in Loper Bright, the Court has placed agencies on the sidelines or least in the penalty box. On the one hand, the Supreme Court has acknowledged the importance of the doctrine of stare decisis stating in Dobbs v. Jackson Women’s Health Organization, 597 U.S. 215, 263 (2022), it “protects the interests of those who have taken action in reliance on a past decision. It ‘reduces incentives for challenging settled precedents, saving parties and courts the expense of endless relitigation.’ . . . It ‘contributes to the actual and perceived integrity of the judicial process.’” (Citations omitted.)  On the other hand, the Supreme Court has created a vast gulf of uncertainty and endless relitigation ahead.

In the heyday of its enforcement efforts against the “technical” tax shelters that began to proliferate in the nineties, the IRS issued, under the authority of I.R.C. § 6011(a), more than thirty notices identifying various transactions as suspect. (The landscape in those days was, after all, a target-rich environment.) These notices described the notorious “listed transactions.” And upon the enactment of the American Jobs Creation Act in 2004, the failure to disclose “reportable transactions” (which included those listed transactions) meant serious penalties and sanctions for taxpayers and their material advisors. See I.R.C. §§ 6662A, 6707, 6707A, and 6708. (That last code section imposed upon noncompliant material advisors a penalty of $10,000 a day, a pronouncement of doom that caused even some revenue agents to blanche.)

With CIC Services, LLC v. IRS, 141 S. Ct. 1582 (2021), though, we learned that the Anti-Injunction Act, a venerable defense in the Government’s toolkit, did not bar, for example, a pre-enforcement challenge to a listing notice, thus allowing a taxpayer to proceed with its argument that such a notice, in that case addressing micro-captive insurance arrangements, violated the Administrative Procedure Act for failure to follow the notice-and-comment rulemaking process as required by the APA.

Now most recently, the Eleventh Circuit, as did the Sixth Circuit previously in Mann Construction, Inc. v. United States, 24 F.4^th 1138 (6^th Cir. 2022), has moved on to the merits of whether the IRS need follow APA notice-and-comment procedures. In Green Rock, LLC v. Internal Revenue Service, 2024-1 U.S. Tax Cas. (CCH) P 50,159, dealing with Notice 2017-10 as to certain conservation easements, the circuit court found that the IRS did need to so follow the APA.

The opinion explained that no express language could be found in the Internal Revenue Code providing an exemption from the APA. And resort to the reportable transaction regime established by the Treasury regulations under section 6011 was unavailing as an agency regulation could not displace a provision of the APA. The IRS had argued that through section 6707A, Congress must have been cognizant of the whole existing listing-notice process and thereby blessed it as an exception to the APA’s requirements. The circuit court found this too oblique; Congress must exempt “expressly.” Finally, the IRS had also argued that Congress could not have intended all the listing notices to be done away with. The circuit court noted that when most of the notices were issued, they did not entail penalties for non-disclosure of the transactions, but in any event, only Notice 2017-10 was before the circuit court.

But whether we see this trend of litigation continuing is questionable as the IRS appears to have partaken at Belshazzar’s feast and has begun to identify listed transactions in proposed regulations. See Announcements 2022-28 (syndicated conservation easement transactions); 2023-11 (micro-captive insurance transactions); and Policy Statement on the Tax Regulatory Process (March 5, 2019) (“The best practice for agency rulemaking is the notice-and-comment process established by the Administrative Procedure Act (APA).”)

The IRS Office of Chief Counsel is tasked with representing the IRS in tax controversies before the U.S. Tax Court. But its mission is broad:

Serve America’s taxpayers fairly and with integrity by providing correct and impartial interpretation of the internal revenue laws and the highest quality legal advice and representation for the Internal Revenue Service.

While IRS Counsel represents the IRS in litigated cases, its goal in those cases is to get to the correct result. Recognizing that unrepresented taxpayers in pending U.S. Tax Court cases lack access to quality legal advice, IRS Counsel implemented a program to help unrepresented taxpayers receive legal advice and limited representation. The Settlement Days program was first developed at the end of 2019, and timely implemented soon after the onset of the COVID-19 pandemic. In his prior life, our own Nick was part of the initial cadre at IRS Counsel that developed and implemented the Settlement Days program. The program enjoyed wide support within the IRS, and the Settlement Days cadre received a number of IRS awards.

The Settlement Days program brings together unrepresented taxpayers with pending U.S. Tax Court cases with volunteer attorneys. After receiving advice about their case, taxpayers can then meet with their volunteer attorney and an attorney from the IRS Office of Chief Counsel to try to resolve their pending tax dispute. Other personnel from the IRS, including revenue agents and revenue officers, are also available to assist the parties in resolving the tax dispute. Revenue agents are able to help IRS attorneys review documents, and, after cases are settled, if there is a resulting tax liability, revenue officers are available to assist taxpayers in resolving the balances due. Moreover, Taxpayer Advocate Service personnel may be available to assist taxpayers with issues they may have in non-docketed years.

Local IRS Counsel field offices may hold Settlement Days a few months prior to a trial session. Tax professionals can look for opportunities to volunteer for those events with their local Low Income Taxpayer Clinics. In addition, IRS Counsel holds three nationwide Virtual Settlement Weeks, which seek to pair tax professionals with unrepresented taxpayers around the country. Those unrepresented taxpayers are then able to meet with a tax professional and IRS personnel to try to resolve the tax dispute. Tax professionals interested in volunteering to help taxpayers can volunteer for the Virtual Settlement Week here:

https://www.americanbar.org/groups/taxation/tax_pro_bono/virtual-settlement-week/