Loper Bright Protects Taxpayers and is Helping End IRS Overreach 

By Tyler Martinez 

Taxpayers should rejoice at Loper Bright Enterprises v. Raimondo.  The landmark decision told courts across the country to exercise independent judgment rather than defer to the whims of agency interpretations.  Ambiguity in a statute is no longer automatic deference.  As a result, the Treasury and IRS regulations touching on tax interpretation are ripe for further review.  But already the case is having an impact on tax litigation.  

3M Company and Subsidiaries v. Commissioner of Internal Revenue is such an example of Loper Bright’s immediate impact.  For decades, the federal government claimed it can reach intellectual property royalty income if the underlying transactions are not “arms length” between a domestic parent company and its foreign subsidiary, as set out in the Treasury’s transfer-pricing regulations.  But 3M argued Brazilian law prohibited 3M from ever realizing the full gains from one of its subsidiaries in that country, and a statute allowed the company to disclaim that unrealized income for U.S. tax purposes.  Everything changed when Loper Bright came down in between the Tax Court ruling and the Eighth Circuit’s review. 

Initially, a strongly divided (7-2-8) Tax Court said 3M owed taxes on the Brazilian income.  As described in a lengthy decision, a seven-judge plurality of the Tax Court held that the regulations were a reasonable interpretation of a statute under Chevron deference, which was still in effect.  Two concurring judges thought the statute required the IRS to allocate the income to 3M as the parent of the Brazil subsidiary.  The remaining eight Tax Court judges would have ruled for 3M.  

In the meantime, Loper Bright came down and the Eighth Circuit reversed the Tax Court.  Judge Stras, deciding for the unanimous three-judge panel, said “Statutes trump regulations,” and the IRS could not do via agency regulation what the statute prohibited, and no deference to the IRS existed under the recent landmark decision of Loper Bright.  (NTUF’s Taxpayer Defense Center filed in the 3M case as amicus curiae.)  The Eighth Circuit further emphasized that, even when Congress confers regulatory authority, it remains the judiciary’s duty to identify and enforce the limits of the delegation in accordance with Congress’s statutory design. 

In 3M, the government sought rehearing en banc, asking the whole Eighth Circuit to review the panel’s decision in favor of 3M—but that was denied.  The government indicated that it was going to ask for the Supreme Court to weigh in, but ultimately let the deadline pass in late June.  Now remanded back to the Tax Court, Judge Richard T. Morrison ruled that there was no deficiency in income tax for 3M, and ordered a refund of $5.2 million dollars back to the company (taxes paid, plus statutory interest).  

The Eighth Circuit is not alone.  The Court of Federal Claims, due to its jurisdiction, gets to review many IRS regulations as part of tax disputes.  In Keysight Technologies, Inc. & Subsidiaries v. United States, the Court of Federal Claims observed in its opening line: “When Chevron fell, so too did the presumption that statutory ambiguity favors the agency.”  The Keysight court rejected the IRS’s claim that its general rulemaking authority justified a regulation that departed from the statutory text, explaining that “[t]he general grant of authority in Section 7805(a), standing alone, is insufficient to supply the requisite authority to the Secretary [of the Treasury].”  The court rejected the federal government’s attempt to “read ambiguity into the Tax Code and then resolve the ambiguity without constraint” as incompatible with Loper Bright. 

And Loper Bright continues to make its impact known in other tax disputes.  In Wepplo v. Commissioner of Internal Revenue, the Tax Court is currently faced with how to apply a suspension on interest on tax liability during the COVID-19 pandemic.  That case centers on tax liabilities that were created before the pandemic, but Congress suspended interest accrual as a relief measure during the declaration of emergency (much like student loans) under an older version of 26 U.S.C. 7508A.  The 2019 version of Section 7508A(d) applied to underpayment interest accruing during the mandatory disaster period even when the underlying tax liability predates the disaster.  The problem: the IRS relied on its regulatory interpretations of the statute to keep charging the Wepplos interest.  

NTUF’s Taxpayer Defense Center filed as amicus in Wepplo to highlight that the Tax Court no longer needed to simply defer to the IRS’s gloss on what the statute meant, thanks to Loper Bright.  We argue that neither statutory ambiguity nor an IRS general rulemaking authority under Section 7805(a) enables the IRS to make rules that undo the mandatory relief Congress prescribed.  The Tax Court’s decision is still pending in that dispute.  

Loper Bright requires courts to respect both sides of a congressional choice.  The IRS and Treasury may only exercise the discretion Congress delegated to them.  Such discretion cannot, however, override clear statutory language or undo the benefits Congress bestowed on taxpayers.  

Tyler Martinez is Director of Litigation for the Taxpayer Defense Center at National Taxpayers Union Foundation. The Taxpayer Defense Center was involved in the Loper Bright case, including filing an amicus brief before the U.S. Supreme Court.