Chevron Deference on Trial: Evaluating the Potential Impacts on Judicial Deference to Treasury Regulations

by Avery Auton, Associate Member, University of Cincinnati Law Review Vol. 92

I. Introduction

Treasury regulations are relied on by taxpayers to interpret the Internal Revenue Code (“IRC”). With the complexity of tax law and the time constraints imposed on Congress, Congress grants a general authority to the Treasury Department to issue binding legal rules to fill the gaps and uncertainties of the IRC. While courts are required to give deference to the Treasury Department interpretations published in Treasury regulations so long as the regulations are not “arbitrary, capricious, or manifestly contrary to the statute,” the deference entitled to Treasury regulations is subject to change when the Supreme Court hands down the opinion in Loper Bright Enterprises v. Raimondo during the 2023–2024 term.¹

This article explores the potential effects on the level of judicial deference afforded to Treasury regulations if Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. is overturned by Loper Bright Enterprises v. Raimondo.² Part II provides background on the Chevron deference, Loper, which is currently being decided by the Supreme Court, and the current level of deference given to the Treasury Department’s Treasury Regulations and the IRS’s official and sub-regulatory guidance. Part III discusses the alternate deference standard that will likely be applied if Chevron is overturned and the taxpayer’s ability to rely on Treasury regulations.

II. Background

The Tax Cuts and Jobs Act of 2017 (“TCJA”) created many changes to the Internal Revenue Code, including, among other things, reducing corporate tax rates, increasing the standard deduction amount, and increasing the estate tax exclusion amount.³ Often referred to as being rushed through Congress, the TCJA left ambiguities in the tax law that needed to be clarified, as only two years after the passage, the Treasury regulations for the TCJA surpassed 1,000 pages.⁴ While courts are currently required to defer to these Treasury regulations, so long as the regulations are not “arbitrary, capricious, or manifestly contrary to the statute,” this could change with the Supreme Court’s potential overruling of the Chevron deference in Loper Bright Enterprises v. Raimondo.⁵

A. The Chevron Deference

The Chevron deference refers to the deference courts give to administrative agencies’ interpretation of statutes.⁶ The Court created the Chevron deference in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. where the Court set forth two steps to determine the deference to give administrative agencies official interpretation of a statute.⁷

In Chevron, Congress administered the Clean Air Act, which allowed the Environmental Protection Agency (“EPA”) to set national air quality standards.⁸ The amendment to the Clean Air Act required states who did not meet the standard set by the EPA to get a permit for any “stationary source.”⁹ The EPA defined a “stationary source” requiring just one permit for the entire factory as the factory was a single “bubble,” allowing the factories to install and modify equipment without applying for a new permit, so long as the alteration did not increase total emissions from the factory.¹⁰ The Court sought to answer whether the Clean Air Act allowed the EPA to interpret the meaning of a “stationary source?” The Court ruled that since “stationary source” was ambiguous and the EPA’s “bubble” interpretation was reasonable, the EPA’s interpretation of the term was entitled to court deference.¹¹

If the Chevron deference applies, courts must apply the agency interpretation of the statute, “even if a court believes that some other interpretation may be better.”¹² To determine if the Chevron deference applies first, often referred to as “step zero,” a court must determine whether the agency was given the authority to issue a binding legal rule, whether general or specific.¹³ Next, if Congress has created a statute of clear meaning, this meaning is what will be used by courts.¹⁴ Second, if the statute is ambiguous, courts will look to the agency’s interpretation, so long as it is a reasonable interpretation of the statute.¹⁵ Ultimately, the court will uphold an administrative agency interpretation so long as it is not “arbitrary or capricious in substance, or manifestly contrary to the statute.”¹⁶

Based on Chevron, it is expected that courts give judicial deference to an agency’s policy choices once Congress has tasked the agency to flesh out the specifics of laws.¹⁷ The policy behind the Chevron deference is the protection of the federal agencies, who are directly accountable to elected officials and have expertise in the tasks administered to them by Congress, to interpret law without having their interpretations questioned by un-elected judges.¹⁸ After forty years, the Supreme Court is reconsidering whether it will overturn the Chevrondeference in Loper Bright Enterprise v. Raimondo.¹⁹

B. The Current Challenge to the Chevron Deference

The Loper Bright Enterprises v. Raimondo oral arguments were held before the Supreme Court of the United States during the October 2023–2024 term.²⁰ Loper, which was consolidated with Relentless, Inc. v. Department of Commerce, challenges the scope of the Chevron deference by questioning whether statutory silence constitutes ambiguity.²¹

Loper Bright Enterprise v. Raimondo arises from the National Marine Fisheries Service (“NMFS”) interpretation of the 1977 Magnuson-Stevens Act, which requires fisheries that operate within 200 miles of the U.S. Coast to have federal observers aboard for 50% of the herring trips to prevent overfishing.²² While NMFS pays a small portion of the monitoring fee, the NMFS interpreted the Act as requiring the fisheries to pay the salaries of the required observers, which is approximately $710 a day.²³ Loper and other fishing companies filed suit against the U.S. Secretary of Commerce, Gina Raimondo, in the District Court of Columbia. The District Court ruled in favor of the government on summary judgment, and the United States Court of Appeals for the District of Columbia Circuit reaffirmed the lower court’s decision.²⁴ The case challenges Chevron deference as it questions NMFS’s power to interpret the ambiguities in the Magnuson-Stevens Act.²⁵

Loper argues the Court overrule Chevron because it harms the balance between the separation of powers between the judiciary and the executive by removing power from the Court and giving it to the executive branch.²⁶ Alternatively, if not overruled, Loper requests Chevron be limited to considering a statute’s silence on an issue as a lack of congressional delegation rather than an “ambiguity” under the Chevron deference.²⁷

C. IRS and the Treasury Department

The Constitution gives Congress the power to tax, which Congress utilized in the enactment of the federal tax law through the IRC.²⁸

https://www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance. In IRC section 7805(a), Congress creates a statutory general authority for the Treasury Department and the IRS to “prescribe all needful rules and regulations for the enforcement of [the IRC].”²⁹ Pursuant to the general statutory authority, the Treasury Department and the IRS create the Treasury regulations.³⁰ Located in Title 26 of the Code of Federal Regulations, the Treasury regulations are considered the official interpretation of the IRC, guiding taxpayers on how to comply with the IRC.³¹

Other forms of official tax guidance issued by the IRS include revenue rulings, revenue procedures, notices, and announcements.³² Revenue Rulings are official guidance posted to the Internal Revenue Bulletin that applies specific facts to the law.³³ The Revenue Procedure provides instructions for tax return filing based on the IRS’s position of applying the IRC.³⁴

D. Deference Afforded to the IRS and Treasury Department

While the Chevron deference was created in 1984, creating about forty years of precedent, it was not until 2011 that the Court determined Treasury regulations are entitled to the Chevron deference, as it was previously debated if tax cases warranted a lesser level of deference.³⁵ Although the Chevron deference was meant to apply to all Congress-authorized agency interpretations of statutes, before Mayo Foundation for Medical Education & Research v. United States, courts, including the Supreme Court, were still indecisive on whether to apply the Chevron deference or the stricter deference standard in National Muffler Dealers Ass’n, Inc. v. United States to Treasury regulations.³⁶ In Mayo, the Federal Insurance Contributions Act regulation exempted students enrolled at a university and working for that university from paying social security tax.³⁷ The Federal Regulations defined this as exempting students who work for their schools “as an incident to and to pursue a course of study,” and this did not include students working over forty hours a week.³⁸ In response to the Treasury regulation, the Mayo Foundation for Medical Education and Research sued the United States regarding its residency program.³⁹ The court determined that since Congress authorizes the Treasury Department to enact regulations that interpret the IRC, the statute was ambiguous regarding the term “student,” and the Treasury’s interpretation was reasonable, the Chevron deference applied.⁴⁰

Five years before the creation of the Chevron deference, the Court created a tax-specific deference standard in National Muffler Dealers Ass’n v. United States that was still utilized by some courts until 2011.⁴¹ In National Muffler, the Court debated what level of deference the Court should give a Treasury regulation, created under the general authority granted in the IRC, defining a “business league.”⁴² In determining whether to defer to the Treasury regulation, the Court looked to see whether the regulation “carries out the congressional mandate in a proper manner.”⁴³ To determine this the Court looks to whether it matches the statute’s plain language, the regulation’s origin, and the purpose of the regulation.⁴⁴ Other factors the Court considered are how long the regulation has been in effect, reliance on the regulation, consistency of the Treasury’s interpretation, and if Congress has scrutinized the regulation in statute re-enactments.⁴⁵ Applying these factors, the Court found the Treasury regulation was entitled to deference by the court.

Alternatively, sub-regulatory guidance such as revenue rulings, revenue procedures, notices, and announcements are not afforded the Chevron deference, but the Skidmore deference, which allows the Court to determine the level of judicial deference given on a case-by-case basis, dependent upon the agency’s adequacy in interpretation.⁴⁶ While rules made through the administrative rulemaking authority prescribed by Congress are entitled to Chevron Deference, “‘interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law’—do not warrant Chevron-style deference.”⁴⁷ Rather, they are “entitled to respect, ‘but only to the extent that they are persuasive.’”⁴⁸ The Skidmore deference looks to multiple factors to determine the weight the agency’s interpretation will have including the“thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later procurements, and all those factors which give it power to persuade, if lacking power to control.”⁴⁹

III. Discussion

The overturning of Chevron may lead to Treasury regulations being less reliable for taxpayers. While the overturning of Chevron will allow judges to interpret ambiguous statutes themselves rather than deferring to agency interpretations, it is likely courts will give Treasury regulations some level of deference.

A. Post-Chevron Deference

It is questioned whether the overturning of Chevron would lead to the court not giving deference to Treasury regulations, meaning the court interprets the statutes themselves, rather than looking to Treasury regulations that interpret the statutes. It is unlikely that an overturning of Chevron in Loper Bright Enterprises will lead to no deference being given to the Treasury regulations. Since the Treasury regulation specific deference standard was created about five years prior to Chevron, and some courts followed this standard until 2011, courts will likely begin following the National Muffler standard again because Mayo never overturned National Muffler.⁵⁰

The National Muffler standard will present a stricter deference standard compared to Chevron, meaning courts will have more flexibility to put into effect the interpretation of a code it believes to be correct. In Chevron, so long as the agency interpretation is a reasonable interpretation of an ambiguity and the agency was given authority by Congress to issue a binding legal rule, the court must defer to the agency’s interpretation.⁵¹ Alternatively, the National Muffler standard gives courts more flexibility in determining the deference it will afford to the agency’s interpretation by balancing an array of factors. The factors balanced in the National Muffler deference standard include whether the interpretation matches the statute’s plain language, the regulation’s origin, the purpose of the regulation, how long the regulation has been in effect, reliance on the regulation, consistency of the Treasury’s interpretation, and if Congress has scrutinized the regulation in statute re-enactments.⁵²

The overturning of Chevron will not likely affect the deference courts give to sub-regulatory guidance such as revenue rulings, revenue procedures, notices, and announcements, as this guidance did not receive the high deference of Chevronto begin with.⁵³ The deference given to the sub-regulatory guidance will likely continue to be in Skidmore, which gives courts a high level of flexibility in determining whether or not to apply the agency’s interpretations and decisions.⁵⁴

B. Lack of Predictability for Businesses and Taxpayers

While the National Muffler deference will likely be afforded to Treasury regulations if Chevron is overturned, it is not certain courts will rely on the Treasury regulation’s interpretation of the IRC. The subjectivity of the National Mufflerdeference standard may lead to inconsistent court interpretations of IRC code sections, leaving taxpayers and businesses with less certainty in relying on the Treasury regulations and court interpretations of the IRC.

A specific example of an ambiguous IRC section with a large effect on small and local businesses is section 199A.⁵⁵ Section 199A of the IRC was created in the TCJA and allows partnerships, sole proprietorships, and S-corporations to deduct up to 20% of qualified business income and qualified real estate investment trusts (“REIT”).⁵⁶ The Treasury Department issued Treasury Regulation Section 1.199A to clarify a number of ambiguities, one example of many being “whether regulated investment companies (“RICs”) that receive dividends from REITs may take the section 199A deduction.”⁵⁷ The initial understanding of the laws was that RICs did not qualify, but the Treasury regulation stated that “the payment by RICs of dividends that certain shareholders may [be] included[d] as qualified REIT dividends under Sec. 199A(b)(1)(b).”⁵⁸ This provides an example of a Treasury regulation that businesses depend on that can make the difference of it getting a 20% deduction or not.⁵⁹ With large tax consequences at issue, a lack of uniformity in interpretation of Treasury regulations can lead to confusion for taxpayers, especially businesses.

An additional consequence of the potential overturn of Chevron is if overturned, businesses and taxpayers may be more likely to challenge Treasury regulations in court.⁶⁰ With the Chevron deference, tax payers are less likely to challenge the interpretations in Treasury regulations in court, as the only way a taxpayer would win a challenge is if the Treasury Department’s interpretation was “arbitrary, capricious, or manifestly contrary to the statute.”⁶¹ Whereas if Chevron is overturned, the court will have more flexibility to rule in favor of taxpayers because they will not be required to give the Treasury Department complete deference, likely making taxpayers feel more comfortable resolving issues in court.

IV. Conclusion

If Chevron is overturned by Loper Bright Enterprises in the 2023–2024 term, judge’s will no longer be required to give deference to Treasury regulations. It is likely judges will still give a lower level of deference to Treasury regulations under the National Muffler tax-specific deference standard, but this will afford judges more flexibility in choosing to interpret the IRC themselves or to defer to the Treasury regulations. Since sub-regulatory guidance such as revenue rulings, revenue procedures, notices, and announcements were not afforded Chevron deference to begin with, the deference afforded to sub-regulatory guidance will likely remain unchanged. If Chevron is overturned taxpayers may no longer be able to confidentially rely on the Treasury regulations.

Cover Photo

Avery Auton

A current 2L, Avery Auton earned her B.A. in Business Non-Profit Administration and Political Science from Franklin College. When not studying for law school Avery enjoys golfing, spending time with family, and hanging out with her cat Jojo.

References

1
Loper Bright Enters. v. Raimondo, 458 U.S. App. D.C. 600 (2022); Reply Brief for Petitioner, Loper Bright Enters. v. Raimondo, 143 S. Ct. 2429 (2023) (No. 22-451); Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 843-44 (1984).
2
Id.
3
Tax Cuts and Jobs Act 2017 (TCJA), Cornell L. Sch. Legal Info. Inst., https://www.law.cornell.edu/wex/tax_cuts_and_jobs_act_of_2017_(tcja) (last visited Apr. 4, 2024).
4
Garrett Watson, Two Years After Passage, Treasury Regulations for the Tax Cuts and Jobs Act Surpass 1,000 Pages, Tax Found. (Dec. 12, 2019), https://taxfoundation.org/blog/treasury-regulations-for-the-tcja/; See also Howard Gleckman, How Will Treasury Fill in the Blanks of the Tax Cuts and Jobs Act?, Tax Pol’y Center (Apr. 17, 2018), https://www.taxpolicycenter.org/taxvox/how-will-treasury-fill-blanks-tax-cuts-and-jobs-act.
5
Loper Bright Enters. 458 U.S. App. D.C. 600; Loper Bright Enters., 143 S. Ct. 2429; Chevron, U.S.A., Inc., 467 U.S. 837.
6
Chevron Deference, Cornell L. Sch. Legal Info. Inst., https://www.law.cornell.edu/wex/chevron_deference (last visited Mar. 11, 2023).
7
Chevron, U.S.A., Inc., 467 U.S. 837.
8
Id. at 840.
9
Id. at 846.
10
Id. at 846-48.
11
Id. at 865.
12
Chevron Deference: A Primer, Cong. Rsch. Serv. (May 18, 2023), https://sgp.fas.org/crs/misc/R44954.pdf.
13
Dan Farber, Everything You Always Wanted to Know About the Chevron Doctrine, LegalPlanet (Oct. 23, 2017), https://legal-planet.org/2017/10/23/everything-you-always-wanted-to-know-about-the-chevron-doctrine/ (quoting U.S. v. Mead Corp).
14
Id.
15
Id.
16
Chevron, U.S.A., Inc., 467 U.S. at 844.
17
Id.
18
Id. at 865-66.
19
Loper Bright Enters. v. Raimondo, 143 S. Ct. 2429.
20
Id.
21
Id.
22
Loper Bright Enters. v. Raimondo, 45 F.4th 359, 363-64 (D.C. Cir. 2022).
23
Id. at 364.
24
Id. at 363.
25
Loper Bright Enters.,143 S. Ct. 2429.
26
Grant Lander, Supreme Court Bulletin: Loper Bright Enterprises v. Raimondo, Cornell L. Sch. Legal Info. Inst. (Jan. 17, 2024), https://www.law.cornell.edu/supct/cert/22-451.
27
Id.
28
U.S. Const. art. 1, § 8; Tax Code, Regulations, and Official Guidance, IRS (Nov. 15, 2023),

https://www.irs.gov/privacy-disclosure/tax-code-regulations-and-official-guidance.
29
26 U.S.C.A. § 7805(a) (West).
30
Id.
31
26 U.S.C.A. § 7805(a) (West).
32
Id.
33
Understanding IRS Guidance- A Brief Primer, IRS (May 1, 2023), https://www.irs.gov/newsroom/understanding-irs-guidance-a-brief-primer.
34
Id.
35
See Mayo Found. for Med. Educ. & Rsch. v. U.S., 562 U.S. 44, 56-57 (2011).
36
U.S. v. Cleveland Indians Baseball Co., 532 U.S. 200, 219 (2001) (citing Nat’l Muffler); Cottage Savings Ass’n v. Comm’r, 499 U.S. 554, 560-61 (1991) (citing Nat’l Muffler); U. S. v. Boyle, 469 U.S. 241, 246, n. 4 (1985) (citing Chevron); see also Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 387, 389 (1998) (citing Chevron).
37
Mayo Found. for Med. Educ., 562 U.S. at 56-57.
38
Id. at 56-57 (quoting 16 Fed. Reg. 12474).
39
Id. at 54-55.
40
Id.
41
Nat’l Muffler Dealers Ass’n, 440 U.S. 472; see also Cleveland Indians Baseball Co., 532 U.S. 200, 219 (citing Nat’l Muffler); Cottage Savings Ass’n, 499 U.S. 554, 560-561 (citing Nat’l Muffler).
42
Id. at 475.
43
Id. at 477.
44
Id.
45
Id.
46
U.S. v. Mead Corp., 533 U.S. 218 (2001); Leandra Lederman, The Fight Over “Fighting Regs” and Judicial Deference in Tax Litigation, 92 B.U.L. Rev. 643, 666; Skidmore Deference, Ballotpedia, https://ballotpedia.org/Skidmore_deference (last visited Mar. 2, 2024).
47
Matthew H. Friedman, Reviving National Muffler: Analyzing the Effect of Mayo Foundation on Judicial Deference as Applied to General Authority Tax Guidance, 107 Nw. L. Rev. Colloquy 115 n. 6 (quoting Christensen v. Harris Cnty., 529 U.S. 576, 120 S. Ct. 1655 (2000)); Islame Hosny, Interpretations by Treasury and the IRS: Authoritative Weight, Judicial Deference, and the Separation of Powers, 72 Rutgers L. Rev. 281, 314 (2020) (“[r]ather, revenue rulings are generally analyzed for deference under the standard established in Skidmore v. Swift & Co.”).
48
Id. (quoting Christensen, 529 U.S. at 587).
49
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).
50
Mayo Found. for Med. Educ. & Rsch. v. United States, 562 U.S. 44 (2011); see Matthew H. Friedman, Reviving National Muffler: Analyzing the Effect of Mayo Foundation on Judicial Deference as Applied to General Authority Tax Guidance, 107 Nw. L. Rev. Colloquy (“[t]he court concluded- without attempting to overturn or replace Nat’l Muffler– that all final regulations should be reviewed under Chevron”); see also Howard Glekman, TaxVox: Individual Taxes, Tax Pol’y Center (Sept. 12, 2023) https://www.taxpolicycenter.org/taxvox/will-supreme-court-use-fishing-dispute-curb-treasury-and-irs-tax-rules (“If the justices reverse Chevron, Treasury and IRS likely would be guided by older opinions, including the 1979 Supreme Court decision in Nat’l Muffler Dealers Ass’n v. U.S.”).
51
Chevron, U.S.A., Inc., 467 U.S. at 840.
52
Nat’l Muffler Dealers Ass’n, 440 U.S. at 477.
53
Friedman, supra note 47; Hosny, supra note 47.
54
Id.
55
Gabrielle Murphy, Chevron Deference In Tax Administration: Can Businesses Confidently Rely On Guidance Promulgated By Treasury In The Wake Of The Tax Cuts And Jobs Act?, 16 J. Bus. & Tech. L. 333, 348-49 (2021) (“it was unclear whether § 199A applied to rental properties, how businessowners with multiple entities should calculate net QBI, how fiscal year businesses should be treated, what exactly qualified as a service business.”).
56
Id. (“REITs are entities established for the purpose of “own[ing] or finance[ing] income- producing real estate.”)
57
Id. at 350.
58
Id. at 352.
59
Id.
60
See Kelly R. Taylor, Will a Supreme Court Case About Fishing Eater Down the IRS?, Kiplinger (Jan. 17, 2024), https://www.kiplinger.com/taxes/will-a-supreme-court-case-about-fishing-water-down-the-irs (“[s]ome supporters of retaining Chevron deference believe that if courts and taxpayers were more likely to challenge the authority of federal agencies like the IRS, it could create confusion and slow down IRS guidance and new tax rules.”)
61
Chevron, U.S.A., Inc., 467 U.S. at 843-44.