What happened?

The United States Supreme Court on June 28 released its opinion in Loper Bright Enterprises v. Raimondo, and Relentless, Inc. v. Department of Commerce, overturning the Chevron doctrine that generally required federal courts to defer to a federal agency's reasonable interpretation of an ambiguous statute. For more details regarding the court’s decision see our previous PwC Tax Insight: US Supreme Court overrules Chevron Doctrine. 

Why is it relevant?

The Chevron doctrine played a critical role in allocating interpretive authority between administrative agencies and the courts and has provided a background principle against which Congress has legislated for 40 years. Federal agencies that engage in rulemaking will be impacted by the Supreme Court’s decision to overturn the Chevron doctrine, which could lead to a significant shift in how statutes are interpreted and enforced through regulations. Specifically, courts must now decide what is the best reading of an ambiguous statute, rather than being required to defer to an agency’s ‘permissible’ interpretation. Federal agencies' interpretations of ambiguous statutory text will not receive the same level of judicial deference (if any) with the potential for more frequent challenges to agency regulations that interpret statutory text. 

What should taxpayers expect? 

The Loper Bright decision is likely to lead to a greater divergence of opinions among courts when they are confronted with challenges to regulatory validity. This development may pose compliance challenges or opportunities for taxpayers. At the same time, by constraining an agency’s ability to interpret an ambiguous statute, the decision will likely promote regulatory stability across presidential administrations. In other words, an executive agency must adopt the ‘best’ interpretation of a statute, rather than choose from a range of reasonable readings, which may limit the ability of a new administration to undo the regulatory actions of its predecessors. 

The Loper Bright decision is focused on agency action interpreting silence or ambiguity in a statute. It also acknowledges, however, that Congress may delegate rulemaking authority to executive agencies within certain bounds. These types of delegations are common throughout the Code. For example, Section 954(b)(5) directs the Secretary of the Treasury to issue regulations on which deductions are ‘properly allocable’ to certain categories of income. It remains to be seen what type of deference courts will provide in that context. Furthermore, questions remain as to the scope of the delegation under Section 7805(a), which asks the Secretary to “prescribe all needful rules and regulations for the enforcement of this title.”  

Observation: The IRS will continue to pursue the examination of issues based on current regulatory guidance. This may result in potential increased litigation if taxpayers choose to pursue the validity of the IRS statutory interpretation in certain circumstances.  

Observation: While the Court’s decision in Loper Bright and Relentless is a federal decision specific to federal courts’ requirements in reviewing federal agencies' interpretations of ambiguous laws, the decision likely impacts how states apply federal regulations when interpreting the state’s conformity and/or application of the Code. While the decision may influence states’ deference to state agencies' interpretations of ambiguous laws in the future, approximately a quarter of states in the past two decades have already limited deference through legislation, judicial decisions and/or constitutional changes.  

Observation: Pursuant to ASC 740, as of each balance sheet date, a company must assess uncertain tax positions to determine whether the factors underlying a position’s sustainability have changed and whether the amount of the recognized tax benefit is appropriate. Changes in the expected outcome of a position’s sustainability (i.e., either the position’s sustainability becomes more-likely-than-not or the position ceases to meet the recognition threshold) should be based on new information, and not on a mere re-evaluation of existing information. A court decision constitutes new information and, as such, the ruling in the Loper Bright case should be assessed in the respective reporting period within which the decision was reached.  

Observation: The Court’s decision could be relevant to ongoing taxpayer challenges to the validity of many Treasury regulations promulgated in the wake of the 2017 Tax Cuts and Jobs Act, such as those under Sections 78 (grossing up income by deductions for foreign taxes for which a taxpayer also claims a foreign tax credit), 245A (providing a participation exemption for dividends from certain foreign subsidiaries), 951A (providing for US taxation of global intangible low-taxed income or GILTI), 960 (deeming certain foreign taxes as paid by US shareholders for purposes of the foreign tax credit), and 965 (imposing a one-time mandatory repatriation tax or toll charge on certain pre-Act earnings of foreign subsidiaries).  

In these recent challenges, taxpayers have generally argued that the applicable Treasury regulation is invalid because it is contrary to the plain language of the statute. In response, the government has defended its regulations, arguing that the relevant statutes are ambiguous and that Treasury may reasonably resolve ambiguities with the benefit of deference by the court. A court faced with a taxpayer’s challenge to the validity of a regulation now must first determine whether Congress has authorized Treasury to prescribe the regulation (for example, through an explicit grant of authority such as Section 245A(g) or Section 7805(a)) or instead the regulation merely represents Treasury’s and the IRS’s interpretation of the Code. If a court concludes the latter, then the deferential approach under Chevron no longer applies and instead the court will need to undertake its traditional role of interpreting the relevant statute, giving due consideration to the positions of each litigating party. Not only may this change impact the validity of existing regulations, but it may also affect Treasury’s and the IRS’s approach to future regulations in the absence of express Congressional authorization to prescribe regulations. 

Observation: Transfer pricing has been a particularly ripe field for substantive and procedural regulatory challenges of different aspects of the Section 482 Regulations as a number of prominent cases have recently shown. As a number of these cases are still pending, Loper Bright and Relentless could have a near-term impact. Similarly, cases that may be in IRS Appeals regarding whether stock-based compensation should be shared in the context of a cost sharing arrangement could now require a different hazards of litigation evaluation.  

These are just a few of the examples of the more immediate impacts, although it is difficult to foresee the long-term effects. On one hand, taxpayers and practitioners are eager consumers of regulations and the certainty they provide, and the Code often expressly calls for Treasury to fill in the gaps of this very complex subject matter. On the other hand, while taxpayers support a fair and deliberate process in the issuance of regulations, a process that becomes too deliberative due to administrative caution as a result of concerns of regulatory challenges would be detrimental. In addition, in the case of regulations as highly complex and technical as many tax regulations are, judges could observe deference without expressly saying so.