Supreme Court’s Chevron Decision Rocks the Boat

Hey there, tax enthusiasts! Are you up to speed on the recent news from the Supreme Court? Grab your calculators and hold onto your hats because the Court's recent decision to upend the 40-year-old Chevron doctrine is sending shockwaves through the tax world. But what does this mean for the IRS and tax professionals? Let's dive into the scoop! 

What’s All the Fuss About?

Let’s understand first what exactly the Chevron Doctrine is! The story starts back in 1984, a significant legal case known as Chevron U.S.A. Inc. v. Natural Resources Defence Council, Inc. marked a turning point. The Supreme Court ruled that when faced with an unclear statute, courts should defer to a government agency's interpretation, provided that interpretation was deemed reasonable. Here’s the nitty-gritty of how it operates: 

• First is the clarity check - The court first checks if the statute clearly shows Congress's intent. If it's clear, everyone must follow it. 
• Next is the reasonableness check - If the statute is ambiguous, the court evaluates if the agency's interpretation is reasonable. If it does, the court goes with the agency’s know-how.

Coming to 2011, the doctrine got its hands on tax regulations, meaning the IRS had some serious power in interpreting tax laws. 

Now, the Supreme Court's upcoming decision in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce is set to shake things up big time. The Court is expected to make a call by the end of its current term, and tax pros everywhere are on edge. 

The Oral Arguments Drama

In January, the Supreme Court heard arguments for the cases challenging a National Marine Fisheries Service regulation. This rule required the herring industry to pay for observers on fishing boats, and both the D.C. Circuit and the First Circuit upheld the rule using the Chevron doctrine. Justice Neil Gorsuch and Justice Clarence Thomas, however, didn't seem too thrilled with the Chevron doctrine, hinting at a possible rollback. 

The Potential Fallout

So, what happens if the Chevron doctrine gets the boot? Leahey believes tax professionals will face a lot of uncertainty, and the day-to-day regulatory framework for tax could be put on hold and litigated. In the long term, Congress will need to be super specific in the statutes it passes – a tall order in today's political climate. 

Mitchell Gans, a tax law professor, suggests that even a weakened version of Chevron could shake things up. He thinks a weaker version of deference might stick around, but the arguments against regulations will be stronger. This shift means that tax litigators and advisors will have their hands full figuring out potential litigation outcomes. 

The IRS’s Next Moves

Since 2011, the IRS has leaned on the Administrative Procedure Act’s (APA) notice-and-comment rulemaking process to make its interpretive regulations eligible for Chevron deference. A study cited by the Congressional Research Service found that the IRS ramped up its resources to promulgate regulations once tax regulations were deemed eligible for Chevron deference. However, with the potential end of Chevron, the IRS might have to rethink its strategy. 

What’s Congress Got to Do with It?

If Chevron gets axed, will Congress step up and write tax laws with crystal-clear specificity about how they're administered? Gans thinks this is a key question. If the Court says goodbye to Chevron, Congress will need to be incredibly specific in the statutes it passes, which might be a Herculean task given the current political environment. 

The Supreme Court’s Options

The justices have a few ways to handle this. They could take a narrow approach, saying in this particular case, statutory silence wasn’t an ambiguity subject to Chevron deference. Or they could go middle-of-the-road and say silence is not an ambiguity. The nuclear option? They could completely overturn Chevron, saying deference to administrative agencies is never required. 

The Bigger Picture

The Supreme Court’s decision will have a ripple effect beyond tax regulations. Federal agencies like the National Labor Relations Board, Department of Labor, OSHA, and the Equal Employment Opportunity Commission have all relied on Chevron’s deference to interpret and enforce statutes. Without it, these agencies will face tougher scrutiny in court, making it harder to defend their interpretations and regulations. 

Challenges Ahead

The Loper ruling is expected to spark challenges to various federal regulations, from the Davis Bacon Act to rules defining independent contractors versus employees under the Fair Labor Standards Act. The new playing field will require agencies to demonstrate that their interpretation is the best reading of the statute, rather than just a reasonable one. 

Why Should You Care?

You might be wondering, 'Alright, interesting tale, but what's the relevance for me? Great question! Here’s the lowdown: If the Supreme Court decides to nix or even dial back the Chevron doctrine, it could create a tidal wave of uncertainty in the tax world. Andrew Leahey, a tax and tech attorney, says tax professionals might have to get cozy with phrases like "probably" and "we think" when advising clients. Yep, you heard that right – the rock-solid advice you used to rely on might get a bit wobbly. 

If the Chevron doctrine sticks, what’s the deal with tax pros?

• Tax pros must keep up with the IRS's interpretations, as these often go unchallenged by courts, and ensure their compliance strategies match IRS guidelines to avoid penalties and audits.
• Advisors must guide clients based on current IRS interpretations of murky tax laws and help them manage risks associated with potential shifts in these interpretations, especially with ongoing rule changes.
• Strategic tax planning requires plans that consider Chevron's stability and align with consistent IRS interpretations while staying flexible to quickly adjust strategies in response to potential IRS updates.
• In IRS disputes, professionals should anticipate courts favoring IRS perspectives, influencing litigation strategies and increasing the focus on negotiating settlements rather than prolonged courtroom battles.

What if the Chevron doctrine gets axed, what tax pros must do?

• Navigating regulatory compliance and interpretation involves understanding that courts may not always support IRS interpretations of ambiguous laws, creating a complex landscape where professionals must navigate both IRS and court rulings carefully.
• In advisory services, professionals provide cautious advice, considering varying court views and ensuring clients understand the risks associated with ambiguous rules. They stay updated on court rulings to adjust tax strategies accordingly.
• Strategic tax planning necessitates readiness for potential IRS disputes, requiring plans that are litigation-ready and emphasizing the need for flexibility to adapt quickly to evolving legal circumstances.
• In litigation and dispute resolution, expect increased conflicts as taxpayers challenge IRS interpretations without automatic deference, focusing on strengthening legal cases against IRS positions.

For now, tax professionals should stay on their toes. The Supreme Court’s decision on the Chevron doctrine is poised to make waves in the tax world and beyond. Tax pros, brace yourselves for a bumpy ride – the days of clear-cut advice might be over, but the journey ahead is sure to be an interesting one. 

Stay curious, stay informed, and keep your eyes peeled for the latest updates. This rollercoaster is just getting started!