Will the Loper Decision Foster Continued Uncertainty in Financial Services Tax Matters? by Magda Szabo, CPA, JD, LLM
Posted on August 21, 2024
by
Magda Szabo
On June 28, 2024, the U.S. Supreme Court issued a landmark decision in Loper Bright Enterprises v. Raimondo,[1] overturning its 40-year long-standing precedent set forth in Chevron v. Natural Resources Defense Council.[2] The latest ruling has far-reaching consequences concerning the courts’ power to override a federal agency’s interpretation (regulatory guidance) of the laws Congress designated it to administer, including the IRS’s enforcement of the Tax Code.[3]
The Chevron decision, which is commonly referred to as the “Chevron Doctrine,” established a legal test for the federal courts to follow when reviewing, approving or rejecting the statutory intent of Congressional regulations. It gave deference to agency interpretation, essentially holding that where a statute is not ambiguous, a plain meaning of the statute should be followed. However, where ambiguity exists, the court must first determine whether Congress addressed the issue’s precise question. If so, the Chevron holding required deference be given to that interpretation. In circumstances where Congress did not address the issue, or the statute is otherwise silent, the Supreme Court held that a court should not “simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation.” Instead, it should defer to the agency’s interpretation if the agency has a “permissible construction of the statute.”
By contrast, the Supreme Court in Loper mandates that the courts “exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” It further held that “courts may not defer to an agency interpretation of the law simply because a statute is ambiguous,” favorably citing the 1944 decision in Skidmore v Swift & Co.[4], which had been used as guidance prior to Chevron.
While the Loper decision explicitly states that it does not apply retroactively, it is reasonably foreseeable that there will likely be a rise in challenges to federal regulatory guidance. Similarly, agencies like the IRS may be less incentivized going forward to undertake the tedious and time-consuming process of issuing proposed regulatory guidance than accepting, reviewing and responding to public comments in order to issue regulatory guidance.
Relative to tax matters involving financial services, IRS regulatory guidance is a significant issue. For example, guidance as to the tax treatment of varied financial instruments, especially derivatives,[5] which have never fit squarely into existing statutory tax provisions but continue to grow materially in usage and design would reduce uncertainty and the potential for abuse.
Since the issuance of subregulatory guidance does not require a lengthy procedural process, the Service may prefer this alternative and instead issue narrower Revenue Rulings, Announcements, Notices and Private Letter Rulings. The issuance of such eclectic subregulatory guidance addressing, for example, the tax treatment of financial instruments, where cohesive Regulatory guidance is needed, may result in an overall negative impact.
About the Author: Magda Szabo, CPA, JD, LLM, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she provides international and domestic tax and wealth planning for public and private businesses, high-net-worth individuals, trusts and nonprofits. She can be reached at the CPA firm’s New York office at (646) 213-7600 or info@bpbcpa.com.
[1] Loper Bright Enterprises v. Raimondo, 603 U.S. ___ (2024)
[2] Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984)
[3] Mayo Foundation for Medical Ed & Research v U.S. 562 US 44 (2010), which held that the Administrative Procedure Act (APA) construction applies to tax guidance.
[4] Skidmore et al v Swift & Co., 323 US 134 (1944)
[5] End users include commercial banks, securities firms, hedge funds, insurance companies, governments, mutual funds, pension funds, individuals, commercial entities, and other dealers who often use derivatives to protect against adverse changes in the values of assets or liabilities.
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