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Two Back-to-Back Tax Cases You May Not Have Heard About

Umito November 6, 2024

Two of the Supreme Court’s most important cases affecting tax planning did not directly address income tax issues and did not even include the word “tax” in the opinion. Nonetheless, these cases significantly affect the enforceability of IRS regulations and guidance. The full effect of these decisions will almost certainly require further litigation in the years to come.

Loper Bright Enterprises v. Raimondo (Docket No. 22-451) was issued by the United States Supreme Court on June 28, 2024. Since 1984, courts have been required to show deference to agencies’ interpretations of ambiguous laws. This rule was established in Chevron USA, Inc. v. Natural Resources Defense Council (1984) (467 U.S. 877). Loper overturned the long-standing rule granting judicial deference to agency (including the IRS) interpretations of ambiguous laws. Simply put, this deference has created an “uphill battle” in challenging IRS regulations.

The Supreme Court determined that the rule established by Chevron did not comply with the Administrative Procedure Act. The Supreme Court even went back to 1803 and ruled that the Chevron the rule of deference violated the Supreme Court’s landmark decision in Marbury v. Madison (1803) (5 US 137), whereby the court decides legal questions using its own judgment. The net result in tax cases is that it is now the court that decides the best interpretation of a contested law, not the IRS.

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A very different standard

Before Loperthe court would determine whether the IRS interpretation was admissible – a very different standard for a taxpayer challenging the IRS interpretation.

Loper recognizes that judicial deference may be appropriate if the statute itself provides that the IRS must issue regulations or guidance. Even in this case, Loper provides that the courts still have independent authority to control the outer limits of regulation and to ensure that the IRS exercises its discretion in a manner consistent with Administrative Procedure Law.

Just after Loperon July 1, 2024, the Supreme Court issued Corner Post, Inc. v. Federal Reserve (File No. 22-1008). Corner post provides that the six-year limitation period in 28 USC section 2401 began to apply when plaintiffs actually suffered harm rather than when the rule, regulation, or law became final.

THE Anti-injunction law (AIA) prevents the prior execution of judicial review. If the statute of limitations begins on the date the regulation is promulgated, then the six-year deadline under AIA section 2401 would run before the plaintiff, or anyone else, could satisfy the requirements of a challenge. The effect of Loper is that a newly created entity would appear to be able to challenge a long-standing regulation that was otherwise considered final and unassailable. In the past, the government has used Section 2401 of the LIA to prevent legal challenges to regulations.

Expect more litigation

We can expect to see more litigation due to the uncertainty created by Loper And Corner post. Taxpayers may now have the opportunity to challenge regulations finalized 10 or 20 years ago and otherwise considered immune from such challenges. Courts must no longer show deference to the IRS’s interpretation of regulations. Taxpayers can now more easily argue for different meanings than those put forward by the IRS.

We can be sure that interesting times lie ahead.

Taxpayers whose positions are well reasoned and based on case law or other authority may now be more willing to take positions contrary to IRS regulations. In the event of a dispute, the court can more easily accept a contrary position. This is true even for regulations that have been in force for many years.

This article was written and presents the views of our contributing advisor, not of the Kiplinger editorial staff. You can check the advisors’ files with the SECOND or with FINRA.