In June, the Supreme Court in Loper Bright Enterprises v. Raimondo overturned Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., eliminating federal judicial deference to agency regulations. Many are commenting about what overturning this long-standing precedent means, and lawyers appear to be gearing up to challenge federal agency regulations. In the meantime, there is significant uncertainty about how overturning Chevron will affect challenges to federal regulations and how agencies will adapt.
Crowe observation
The Supreme Court also decided Corner Post, Inc. v. Board of Governors of the Federal Reserve System, generally extending the time to file a procedural challenge to federal rulemaking, further increasing the potential for litigation.
The U.S. Department of the Treasury and the IRS are not immune to this uncertainty or from the potential for increased litigation involving federal tax regulations. While it is still early, following are five factors to consider regarding post-Loper challenges to the validity of federal tax regulations.
- Cost and publicity of legal challenges. One of the uncertainties left in the wake of Loper is how courts will review agency regulations now that the Chevron framework no longer applies. This potential gating question, before any technical analysis of a regulation, is susceptible to several interpretations, and each court will be applying its own judgment. The first cases challenging agency regulations after Loper likely will be long, drawn-out affairs involving teams of lawyers and a significant number of documents, data, and experts. Lawyers, academics, industries, and the public at large will watch these cases closely, and the media likely will extensively cover the facts and circumstances of each lawsuit, including the names of the parties and business and personal details. One or more federal tax regulations could be among these first cases, and all eyes will be on these proceedings.
- Application of a decision. An unsettled question is how broadly a successful regulatory challenge will apply. This issue has been raised previously in federal tax cases. Even if a taxpayer is successful in challenging a federal tax regulation, it is unclear how that decision might affect other taxpayers. Taxpayers awaiting the outcome of litigation should consider whether affirmative steps, if any, might be warranted (such as disclosure or a protective claim for refund).
- IRS’ authority to collect taxes. Once the IRS makes a valid assessment of federal tax, it has powerful tools to collect those taxes. While assessment is restricted in certain cases (for instance, if a taxpayer timely files a petition in the U.S. Tax Court to challenge a deficiency), these restrictions do not always apply. Challenges to tax regulations after assessment can be tricky and might require paying the tax and claiming a refund.
- Other legal doctrines. Federal tax regulations have been challenged for not meeting procedural requirements under the Administrative Procedure Act. Challenges to federal tax regulations must overcome hurdles imposed by the Anti-Injunction Act. Taxpayers also must establish that they have met certain prerequisites to even bring a case challenging a federal tax regulation. Any of these legal doctrines could come into play in a case challenging federal tax regulations.
- Nonregulatory tax guidance. Chevron generally applied to regulations. However, it is unclear whether the Supreme Court’s decision in Loper will affect how courts view of other types of federal tax guidance, such as documents published in the Internal Revenue Bulletin.
Looking ahead
Taxpayers continually navigate uncertainty in federal tax matters. The Supreme Court’s recent decisions will only add to this complexity. Taxpayers should work closely with their tax advisers to understand the current landscape and evaluate how best to proceed.
