In Loper Bright Enterprises v. Raimondo, No. 22-451 (June 28, 2024), a majority of the US Supreme Court (Court) overturned the 40-year precedent in Chevron U.S.A. Inc v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), which had been a mainstay precedent instructing courts to defer to the decisions of federal agencies when a statute is ambiguous. In place of the so-called Chevron deference, the majority opinion in Loper Bright held that courts must exercise their independent judgment when interpreting statutory language.

Facts

Loper Bright involved application of the Chevron doctrine to evaluate the validity of rules promulgated by federal agencies. The Chevron doctrine required courts to use a two-step framework to evaluate the validity of agency rules — including regulations. First, the court had to assess whether Congress had directly spoken to the precise question at issue. If so, then the court had to apply the statute as Congress intended. If not, and the statute was ambiguous, the court proceeded to step two of the Chevron analysis. Under step two, the court had to defer to the agency's interpretation if it was based on a permissible construction of the statute.

The specific agency actions at issue stemmed from two companion cases challenging a rule promulgated by the National Marine Fisheries Service (NMFS), which administers the Magnuson-Stevens Fishery Conservation and Management Act (MSA). The rule required fishing vessels to pay for an observer when the MSA required data from an observer. The petitioners asserted that the MSA does not authorize NMFS to require them to pay for observers. In both cases, the district courts granted summary judgment to the government, saying that MSA authorized the rule, but the court should defer to the agency's interpretation under Chevron if the statute was ambiguous. The appeals courts affirmed but found that the MSA was ambiguous so the court should defer to the agency's interpretation under Chevron.

The Court agreed to hear the cases and decide whether Chevron should be overruled or clarified.

Court analysis

Chief Justice John G. Roberts, Jr., writing for the Court in a majority opinion joined by Justices Clarence Thomas, Samuel A. Alito, Neil M. Gorsuch, Brett Kavanaugh and Amy Coney Barrett, found that Chevron's two-step analysis is "misguided" because courts, not agencies, have special competence in resolving statutory ambiguities. In expressly overturning Chevron, Chief Justice Roberts states that, rather than deferring to agencies, courts "must exercise their independent judgment in deciding whether an agency has acted within its statutory authority."

While rejecting Chevron deference, the majority opinion still instructs courts to give "[c]areful attention" and "respect" to the views of federal agencies when properly presented through various rules, including regulations. The majority opinion also allows that, in some instances, Congress has expressly delegated lawmaking authority to an agency, in which case some level of deference would be consistent with the statute itself. But a court may not defer to an agency interpretation of a statute "simply because a statute is ambiguous."

The majority opinion explains that the opinion in Loper Bright does not call into question prior cases that relied on the Chevron framework, saying that the holdings of cases finding specific agency actions lawful "are still subject to statutory stare decisis despite the Court's change in interpretive methodology." The majority opinion explains that "[m]ere reliance on Chevron" is not sufficient justification for overruling a prior precedent.

Implications

The Supreme Court's overruling of Chevron, a mainstay precedent informing the weight given to Treasury regulations for decades, has potentially broad implications for the Treasury Department and the IRS going forward. A large body of case law has developed around the issue of Chevron deference, informing how courts should determine the validity and weight of Treasury regulations. Courts now must apply the standard announced in Loper Bright and grapple with new issues such as:

• The scope of the Loper Bright standard
• The application of Loper Bright to the varying grants of rulemaking authority
• The contours of the "respect" or "careful attention" that courts must now give agency actions, as opposed to "deference"
• The extent that stare decisis will apply to the Chevron-era cases

Because Loper Bright makes the courts the ultimate arbiter of these critical questions, clarity on these issues will only come over time as the courts begin to apply the Loper Bright standard to Treasury regulations in actual cases and controversies. The ultimate resolution of these questions could result in Treasury regulations that are substantially the same as would have been allowed under Chevron deference; such a determination, however, will require substantial time to play out through the lower courts' actual application of the new standard.

In the meantime, many taxpayers may consider challenging the positions taken by Treasury and the IRS in certain regulations. In evaluating the technical merits of a challenge, taxpayers should consider their dispute strategy and compliance plan. For example, taxpayers may want to file an amended return or may wish to "wait-and-see" while ensuring the statute of limitations does not lapse. Taxpayers should also consider follow-on quantitative and qualitative consequences of an alternative statutory interpretation. For example, an alternative position may impact taxpayers' results under multiple code provisions and multiple years.

Ernst & Young LLP (US) does not practice law or offer legal advice.