Long Live Tax Exceptionalism? - The Impact of Loper Bright I.R.C. § 7805

Blog Post | 113 KY. L. J. ONLINE | October 20, 2024

Long Live Tax Exceptionalism? - The Impact of Loper Bright I.R.C. § 7805

By: Alex Heaton, Staff Editor, Vol. 113 

Earlier this year, the United States Supreme Court in Loper Bright Enterprises v. Raimondo overruled the Chevron doctrine ,[1] sending shockwaves through the legal community. While all federal agencies will be impacted, this decision could have a substantial impact on how interpretive regulations are issued by the Department of the Treasury (Treasury) and the Internal Revenue Service (I.R.S.) under the general authority statute in I.R.C. § 7805(a) (Section 7805(a)). Almost ten years ago, courts faced a similar situation where the accepted standard to review interpretive regulations issued by the I.R.S. and Treasury in National Muffler Dealers Association v. U.S.[2] was scrapped in favor of the test outlined in Chevron.[3] This became known as the beginning of the end of tax exceptionalism,[4] but with Chevron overruled, where does that leave them now? 

Before Chevron, courts grappled over how to treat rules issued under Section 7805(a). This authority is not new; rather, this general grant of authority for revenue provisions has been at the center of a problem for nearly 40 years.[5] Section 7805(a) permits “the Secretary [to] prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alternation of law in relation to internal revenue ,”[6] and both the I.R.S. and Treasury have relied on this statute to issue interpretative rules under this section as far back as the Civil War with the continued support of Congress.[7] 

Section 7805(a) was at the center of National Muffler,[8] which created a new test that required courts to “customarily defer to the [Treasury] regulation” so long as the “regulation carrie[d] out the congressional mandate in a proper manner...[that] harmonize[d] with the plain language of the statute, its origin, and its purpose.”[9] This test was reinforced in subsequent cases and became a foundational concept in reviewing interpretive revenue regulations .[10]  

In 2011, however, the Supreme Court concluded that courts should no longer apply the multi-factor test set out in National Muffler, but should instead apply the test laid out in Chevron to review interpretative Treasury regulations .[11] With Mayo’s decision to overturn the application of a “less deferential standard of review to the Treasury Department’s interpretation of the tax code,” what was once known as tax exceptionalism was considered dead.[12] However, with Chevron overturned, the question now turns to whether tax exceptionalism has returned.

While courts could return to the National Muffler test and treat cases using the general authority statute as they did before Mayo, the test that gave some “deference” to the I.R.S. and Treasury could run into the same problems that Chevron did. Chief Justice Roberts in Loper Bright did not “call into question prior cases that relied on the Chevron framework,” however, he stated that “the holdings of those cases that specific agency actions are lawful...[and] still subject to statutory stare decisis despite our change in interpretive methodology .”[13] This statement alone should shut the door to any return of a pure National Muffler standard. 

Courts would thus be better off returning to the “power to persuade” test outlined in Skidmore v. Swift & Co.[14]Now that courts will be asked to rely on their own “independent judgment in deciding whether an agency has acted within its statutory authority,” they will need to weigh each argument independently through the lenses of the A.P.A.[15] By viewing regulations through this balancing test, it would allow courts to take into account the “body of experience and informed judgment” of the agencies while being “consistent with the A.P.A,” just as Chief Justice Roberts stated.[16] By balancing the arguments and expertise of the agency and taxpayers during the notice and comment period, courts will have a framework for interpretative regulations that not only respects the technical expertise of the agencies but allows for the concerns of the taxpayers to be fairly heard. This path is the logical middle ground that has seen support from the Supreme Court in the past.[17]  

We will not have to wait long to see a court apply Loper Bright to a set of tax regulations. In 3M Company & Subs. v. Commissioner of Internal Revenue, both 3M and the Government argue that Loper Bright supports their interpretation of I.R.C. § 482.[18] With arguments set for October 22, 2024,[19] we should get a better idea of how courts will apply Loper Bright to tax regulations in the near future.

[1] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2262 (2024).

[2] See National Muffler Dealers Association v. U.S., 440 U.S. 472 (1979).

[3] See Mayo Found. For Med. Educ. & Rsch. V. United States, 562 U.S. 44, 56-57 (2011). 

[4] See Christopher J. Walker & Stephanie Hoffer, The Death of Tax Exceptionalism’s Next Victim: The United States Tax Court, TaxNotes (Apr. 17, 2014), https://www.taxnotes.com/procedurally-taxing/death-tax-exceptionalisms-next-victim-united-states-tax-court/2014/04/17/7h73d.

[5] See National Muffler, 440 U.S. at 476-77.

[6] 26 U.S.C.A. § 7805(a).

[7] See  Bryan T. Camp, A History of Tax Regulation Prior to the Administrative Procedures Act, 63 Duke L. J. 1673, 1696–1700, 1711 (2014) (stating that the statute goes back not only to the Civil War, but potentially back even further).   

[8] National Muffler, 440 U.S. at 476-77.

[9] Id. at 476-77.

[10] See Rowan Companies, Inc. v. United States, 452 U.S. 247, 253 (1981); see also United States v. Vogel Fertilizer Co., 455 U.S. 16, 28 (1982) (finding that the regulation did not meet the test outlined in National Muffler). 

[11] See Mayo Found.. For Med. Educ. & Rsch. V. United States, 562 U.S. 44, 56-57 (2011).

[12] Walker & Hoffer, supra note 4.

[13] Loper Bright Enterprises v. Raimondo, 144 S. Ct. at 2273.

[14] See Skidmore et al. v. Swift & Co.,323 U.S. 134 (1944); See also Kisor v. Wilkie, 588 U.S. 558, 573 (2019) (“courts should not give deference to an agency’s reading, except to the extent it has the ‘power to persuade.’”).

[15] Loper Bright Enterprises, 144 S. Ct. at 2273.

[16] Id. at 2262; see also Calvin H. Johnson, The ‘Satisfactory Explanation’ Obligation for Tax Regulations, TaxNotes (Sep. 30, 2024), https://www.taxnotes.com/tax-notes-federal/practice-and-procedure/satisfactory-explanation-obligation-tax-regulations/2024/09/24/7lm6p?highlight=7805#7lm6p-0000093 (noting that a persuasive standard is not a new concept and that agency rules are considered to be persuasive in tax law).

[17] See Kisor, 588 U.S. 573 (2019).

[18] See Notice of Supplemental Authorities Pursuant To Federal Rule of Appellate Procedure 28(j), 3M Company & Subsidiaries v. Commissioner of Internal Revenue (8th. Cir. 2024) (No. 23 3772), https://www.taxnotes.com/research/federal/other-documents/other-court-documents/3m-says-loper-bright-supports-reversal-transfer-pricing-appeal/7kgg7; Commissioner's response to notice of supplemental authorities pursuant to Fed. R. App. P. 28(j), 3M Company & Subsidiaries v. Commissioner of Internal Revenue (8th. Cir. 2024) (No. 23 3772), https://www.taxnotes.com/research/federal/other-documents/other-court-documents/doj-responds-loper-bright-letter-3m-transfer-pricing-case/7kgty.

[19] Argument Response/Appearance Form, 3M Company & Subsidiaries v. Commissioner of Internal Revenue (8th. Cir. 2024) (No. 23- 3772), http://ocr.docketalarm.com/cases/US_Court_of_Appeals_Eighth_Circuit/23-3772/3M_Company_v._Commissioner_of_Internal_Revenue/#:~:text=Case%20docket:%203M%20Company%20v.%20Commissioner%20of%20Internal%20Revenue,%2023-3772.