What Loper Bright means for taxpayers: Treasury Regulations, pending disputes, transfer pricing, planning, and more

By now, you’ve already read about how the death of Chevron at the hands of the Supreme Court in Loper Bright is a paradigm shift and a veritable earthquake for federal agencies, including for Treasury and the IRS. And you’ve probably seen some general speculation about what will take Chevron’s place when courts review regulations. (There appears to be an emerging consensus – as suggested by Justice Kagan’s dissent – that courts will review most regulations for their “persuasive power” under something like the Skidmore doctrine.) But we wanted to move past broad generalizations and drill down to consider some near-term and longer-term questions specific to tax regulations, disputes, and planning that are interesting and salient for our clients.

What does Loper Bright mean for tax administration and enforcement?

In reading Loper Bright through a tax-specific lens, one paragraph stands out for its dissonance with the IRS’s fundamental task of consistent tax administration. In defending Chevron deference, the Solicitor General invoked the nationwide uniformity that it helps foster. The majority opinion, however, questioned whether the Chevron “doctrine as a whole (as opposed to its highly deferential second step) actually promotes such uniformity” and stated that “there is little value in imposing a uniform interpretation of a statute if that interpretation is wrong.”

In any event, the majority suggests that “uniformity for uniformity’s sake” is not a compelling interest. This runs counter to the certainty that Treasury Regulations provide to taxpayers in some circumstances, as well as to some core tax administration values. For instance, IRS Large Business and International has specific enforcement campaigns with the goal of achieving consistent audit outcomes across different taxpayers. And IRS Appeals has Appeals Coordinated Issues, which are issues “with IRS-wide impact or importance” that require “coordination to ensure consistent treatment.” Indeed, the uniformity of the IRS’s interpretation of the law – and how the IRS applies the law to taxpayers – may be considered important to the IRS’s institutional legitimacy. Different results for similarly situated taxpayers risk undermining taxpayers’ faith that the IRS is acting fairly – that faith is important when it comes to a tax system (like ours) that relies on voluntary compliance. Therefore, there is an important sense in which “uniformity for uniformity’s sake” does matter for tax administration.

The majority opinion’s apparent concession to some precedential stability – stating that it does “not call into question prior cases that relied on the Chevron framework” and that those cases “are still subject to statutory stare decisis” – is cold comfort for any case law that is not a Supreme Court precedent. After all, other litigants could theoretically bring the same challenge in a different circuit and create a split. If Loper Bright results in courts drawing different conclusions about the validity of regulations, it may disrupt the IRS’s efforts to apply the tax law with uniformity. And, if that happens, there is good reason to think that the IRS may try to restore uniformity, even if it takes longer to close audits or resolve issues. In that sense, Loper Bright might slow down the IRS’s administration and enforcement efforts.

Will Loper Bright mean that Treasury and the IRS will be slower or more parsimonious when it comes to issuing regulations?

Some commentators raised similar concerns with the surge in Administrative Procedure Act (APA) challenges to Treasury Regulations after the Supreme Court’s decision in Mayo. And it is reasonable for taxpayers to think about their collective dynamic with Treasury and its rulemaking processes – when Congress changes the tax law, clear and promptly issued Treasury Regulations provide taxpayers with much-needed guidance and certainty.

As with tax administration and enforcement, one possible effect of Loper Bright may be a slowdown in IRS and Treasury rulemaking. The looming threat of taxpayer challenges about whether some set of rules is the “best interpretation” of the law will likely prompt further agency reflection. Whether such a slowdown is a bad thing for taxpayers depends on the circumstance. Some regulatory projects are urgent. For instance, stakeholders have pressed for energy-credit guidance under the Inflation Reduction Act of 2022 because they need to make quick decisions about investments in clean energy infrastructure.

But a slower rulemaking process might help in other cases. With the growth in APA challenges, Treasury and the IRS have taken pains to write longer and more detailed preambles for proposed and final regulations. Those efforts arguably make for regulations that are more transparent and thoroughly considered. That is, after all, the point of the APA. And if Loper Bright forces the IRS and Treasury to think harder about whether their regulations accord with the underlying statutory scheme, especially when they do so in the context of a robust notice-and-comment exchange with interested stakeholders, it will likely result in better rules.

Whatever the effect on the speed of IRS and Treasury rulemaking, Loper Bright is unlikely to cause the IRS or Treasury to become stingy about issuing regulations. Both agencies are staffed by dedicated and professional regulators. Loper Bright makes it clear that agencies play a crucial role in regulations, acknowledging that “an agency’s interpretation of a statute … may be especially informative ‘to the extent it rests on factual premises within [the agency’s] expertise.’” When Congress enacted the Tax Cuts and Jobs Act in 2017 – and fundamentally changed international tax – there were crucial interpretive questions that it left unanswered, and the responsibility for answering them fell first and foremost on the IRS and Treasury. Those agencies will likely continue to shoulder that burden, regardless of whether their rulemaking efforts survive challenges.

Will Loper Bright change how Treasury and the IRS approach their rulemaking efforts?

It is likely that Treasury and the IRS will adjust to Loper Bright (and the cases decided in its wake) with refinements to their rulemaking processes as well as to the arguments and rationales they offer in support of their regulatory efforts. One aspect of that likely change is worth mentioning here: Loper Bright almost certainly means that those agencies will attend to whether their regulations are issued under an express statutory delegation of rulemaking authority (legislative regulations) or under their general delegation to “prescribe all needful rules and regulations for the enforcement of” the Code under Section 7805 (interpretive regulations).

For legislative regulations, Treasury and the IRS will likely lean heavily on the specific delegation from Congress under which they are promulgating rules. When a statute “delegates authority to an agency consistent with constitutional limits,” Loper Bright provides that courts fulfill their obligation “to independently interpret the statute and effectuate the will of Congress” by “ensuring the agency has engaged in ‘reasoned-decision-making.’” This is a decidedly lower standard of review than what Loper Bright affords interpretive regulations. It means, however, that taxpayers will not categorically cede to agency assertions that regulations are legislative. For example, when Treasury and the IRS issued anti-abuse regulations under Section 245A, they cited both the specific grant of authority in Section 245A(g) – to “prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of” that section – and Section 7805. Taxpayers challenging the anti-abuse rules could argue that those rules are not within the express grant of Section 245A(g) and warrant a fresh look as interpretive regulations.

For such interpretive regulations, the rulemaking that those agencies carry out under Section 7805 alone arguably amounts to merely interpreting the code when it is ambiguous, which is why they are termed “interpretive regulations.” Loper Bright stands for the proposition that “courts need not and under the APA may not defer to an agency interpretation simply because a statute is ambiguous.” Therefore, when the IRS and Treasury cannot point to a specific delegation of authority in the code and rely on the general delegation under Section 7805, we expect to see them endeavor to explain why the code lends itself only to the interpretation reflected in their rulemaking. By the same token, however, we expect that Loper Bright means that courts will be open to challenges to interpretive regulations issued under Section 7805 alone.

What effect, if any, will Loper Bright have on docketed cases challenging Treasury Regulations?

For ongoing disputes in which taxpayers are challenging the validity of Treasury Regulations, Loper Bright likely shifts the playing field in the taxpayers’ favor. And it appears that taxpayers will not need to wait long to find out what courts will do with tax regulations.

• There are two docketed cases in the Tax Court – Varian Medical and Sysco – in which taxpayers are challenging the agencies’ attempt to alter an express statutory effective date via a Treasury Regulation under Section 78. In each case, the Tax Court issued an order directing the parties to submit briefs about the effects of Loper Bright on that challenge to the Treasury Regulation.


• In 3M, the taxpayer submitted a letter to the Eighth Circuit arguing that Loper Bright “refutes key premises of the Tax Court's ruling” that upheld the “blocked income” Treasury Regulation under Section 482.


• The Supreme Court put Loper Bright in action with respect to the Treasury Regulation at issue in Lissack, vacating the Tax Court’s denial of a whistleblower award based solely on that regulation under Section 7623 and remanding the case for further consideration under Loper Bright.


• In the latest battle in the war over conservation easements, the Tax Court struck down Treasury’s “proceeds regulation” as “procedurally invalid under the APA because Treasury failed to respond to a significant comment.” If the IRS appeals the decision in Valley Park Ranch, Loper Bright does nothing to help the government – since it clarifies that the APA is the proper framework under which the circuit court must evaluate that regulation – and might even give the circuit court another option for striking down the proceeds regulation. That regulation prescribes some highly technical requirements for conservation easement deductions that are hard to glean from the statute. The circuit court could very well find that the proceeds regulation does not comport with the “best meaning” of the statute and is therefore invalid under Loper Bright.

Will Loper Bright affect ongoing transfer-pricing cases?

There are several ongoing transfer-pricing cases where Loper Bright could materially affect the outcome. The Facebook case involves some cost-sharing regulations that the taxpayer may argue are invalid. In an earlier case, Veritas, the Tax Court held that the IRS could not value a cost-sharing contribution using an income method that also captured goodwill and going-concern value because those were statutorily excluded from the class of compensable intangibles. In 2009, Treasury and the IRS revised the cost-sharing regulations to introduce the concept of “platform contributions,” for which those regulations expressly blessed the income method as a means of valuation. If the taxpayer presses the issue, the Tax Court may have to decide whether those 2009 cost-sharing regulations capture the “best interpretation” of a statute that continued to exclude goodwill and going-concern value from the definition of “intangible” until Congress amended that statute in 2017.

In Abbott, the Tax Court may have an opportunity to revisit a cost-sharing issue on which the Ninth Circuit reversed a unanimous Tax Court opinion. In Altera, the Tax Court invalidated a regulation that required taxpayers to include the cost of stock-based compensation in their cost-sharing calculations. Applying the Chevron standard of deferential review, the Ninth Circuit reversed the Tax Court and concluded that the regulation was a reasonable interpretation of Section 482. The Abbott case offers the Tax Court an opportunity to revisit that issue and it could invalidate that regulation again.

In Medtronic, the IRS has – now for the second time – appealed to the Eighth Circuit the Tax Court’s refusal to apply the IRS’s comparable profits method (CPM). In this second appeal, the IRS is advancing a hyper-technical reading of the Section 482 regulations to argue that (1) those regulations set a high bar for using the comparable uncontrolled transaction method that requires near-perfect comparability and (2) the regulations set a bar for using the CPM that is easy to meet and makes the CPM broadly applicable. With Loper Bright, however, the Eighth Circuit is not beholden to the interpretation of the arm’s-length standard in the Treasury Regulations under Section 482. This may make the Eighth Circuit likelier to defer to the Tax Court’s economic conclusion that the taxpayer’s unspecified method is the most reliable price for the related-party transaction under that standard.

What else might Loper Bright mean for transfer pricing?

The Medtronic case highlights why the Treasury Regulations under Section 482 are particularly susceptible to challenge under the new Loper Bright paradigm. Section 482 is a brief statute that empowers the IRS to “distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among” related parties to conform the prices for related-party transactions to the arm’s-length standard. The IRS and Treasury have promulgated an elaborate and complex set of regulations under Section 482, all of which purport to reflect an interpretation of how the arm’s-length standard applies to all different kinds of related-party transactions. Loper Bright may open the door to challenges to any of the regulations under Section 482, especially given the overlay of the Supreme Court’s decision in Corner Post regarding the statute of limitations for such challenges, which decision deserves its own alert.

In that sense, Loper Bright might usher in some fundamental changes in how taxpayers think about the entire US transfer-pricing regime. It is conceivable that Loper Bright might invite taxpayer challenges about whether Congress has the authority to delegate the broad rulemaking authority that the IRS and Treasury have exercised with the regulations they have issued under Section 482.

How will Loper Bright affect tax planning?

The end of Chevron continues the evolution in how tax advisors may weigh the strength of their clients’ return positions. Our tax advisors have begun to map out how taxpayers and their advisors might think through the some of the considerations that arise in taking a position contrary to the Treasury Regulations. They have put together a preliminary flow chart that reflects their current thinking, available for download below. Those advisors have generally treated published IRS guidance, whether in the form of Treasury Regulations or lesser, subregulatory guidance, as definitive IRS pronouncements of specific interpretations of the tax law. For the latter, the Supreme Court clarified how courts will evaluate subregulatory guidance from agencies like the IRS in the Kisor case. That case “cabined” the Chevron corollary – generally known as Auer deference – that gave some deference to agency interpretations of their own ambiguous regulations. Kisor laid out steps for analyzing when such agency interpretations warranted deference. It meant that planners were more likely to dismiss potential IRS positions that were inconsistent with other agency guidance as mere “litigating positions.”

To download the flow chart, please click the button below:

In contrast to Kisor, which limited but did not altogether eliminate Auer deference, Loper Bright eliminates Chevron deference altogether. As a practical matter, this means that careful tax advisors – and, increasingly, the underwriters involved with insuring tax return positions – will meticulously consider any gaps between Treasury Regulations, on the one hand, and, on the other, the statutory purpose embodied in the statute’s plain language and reflected in legislative history. In other words, the mere existence of contrary Treasury Regulations is not necessarily a death knell for any particular tax position, where in the past it may effectively have been. The apparent upshot of Loper Bright is that tax planners will be more likely to advise taxpayers to take beneficial positions, even in the face of looming or existing Treasury Regulations to the contrary.

That said, the end of Chevron is far from a carte blanche for planners. After all, regulations are not the only way for the IRS to rein in tax planning that it views as aggressive. In the tax-shelter disputes of the early 2000s, the IRS successfully used the array of judicial doctrines at its disposal – including the substance-over-form, step-transaction, and economic-substance doctrines – to win cases where the taxpayers had technical or regulation-based arguments to support their positions. Indeed, today the IRS appears to be using those doctrines to challenge taxpayer positions that have historically been respected, eg, using the economic substance doctrine to challenge Granite Trust-type transactions. The new Loper Bright paradigm may imbue courts with more power to examine regulations. And it may incentivize taxpayers to lobby Congress for clearer statutes that provide certainty that regulations might no longer provide. But it will not deter courts from applying those judicial doctrines. Because they are judicial doctrines, Loper Bright may not affect their application. And taxpayers who document the purpose and economics of their transactions are generally better prepared to defend transactions from IRS attack under those doctrines. For more information, please contact the authors.