By Just when the IRS was starting to get its mojo back, the Supreme Court had to go and throw a wrench into the works.
By now, most civic-minded Americans will have heard about the recent high court rulings that threaten to crush the administrative state, crippling the government’s ability to enact and enforce critical regulations that advance the nation’s interests and protect her citizens.
My colleague Jackie Mogensen recently described how a 2023 Supreme Court decision limiting the EPA’s jurisdiction has made way for polluted rivers. June’s rulings bode far worse, for both the natural environment and efforts to combat climate change. Colleague Nina Martin has examined how the new rulings will be weaponized to gut reproductive rights. The New Republic’s Timothy Noah covered how they may affect the banking sector—and the economy. Others have looked at impacts on health care. And so I set out to determine the extent of the chaos the court’s rulings will unleash on the federal tax system.
Short answer: Nobody knows, but it won’t be pretty.
Loper “unleashes so much chaos,” says Georgetown Law professor Brian Galle. “I think you will see a massive wave of antiregulatory lawsuits.”
Tax law is extraordinarily complicated. So much so that few lawmakers have any hope of understanding its nuances. Attorneys who specialize in tax, as one of my sources points out, tend to go beyond law school to obtain a master’s degree. Tax is also a realm that demands long-term planning by individuals and businesses. Stability is important. But with the Supreme Court latest actions, “what used to be fairly settled law now becomes potentially unsettled,” says attorney Harvey Dale, who has taught tax at the New York University School of Law for more than four decades. “It’s a very, very bad outcome.”
Two rulings in particular “will bring much more litigation into the federal courts. I’m talking hundreds, maybe thousands of litigations trying to take down regulations, some of which may be 50 years old. So that unsettles planning for the entire nongovernmental sector,” Dale says.
First and most notable is Loper Bright Enterprises v. Raimondo, wherein the Supreme Court majority killed the so-called Chevron deference. Chevron is the legal standard that has long guided career experts at federal agencies as they carried out the intent of Congress, translating broad legislative strokes into enforceable regulations related to climate, commerce, energy, health care, and other realms. The demise of Chevron makes it easier for special interests to successfully challenge federal agencies in court—and to tie up pending regulations with nuisance lawsuits.
Adding insult to injury was Corner Post Inc. v Board of Governors, in which the majority stunned observers by ruling that the six-year statute of limitations for challenging federal regulations begins not when a regulation is first enacted, but rather when the party who brought the complaint was first affected. Corner Post puts Loper on steroids, making almost any regulation fair game.
These decisions, Dale says, “emasculate” the rulemaking ability of highly technical federal agencies, “because they’re going to be worried—correctly—about the extent to which litigation will bring them to court, and maybe invalidate their regulations.”
Loper “unleashes so much chaos,” concurs Georgetown Law professor Brian Galle, who teaches courses in taxation, nonprofits, and behavioral law and economics. “I think you will see a massive wave of antiregulatory lawsuits.”
“A rule of judicial humility gives way to a rule of judicial hubris,” Justice Kagan wrote in her Loper dissent. “The majority disdains restraint, and grasps for power.”
Tribune Media Company barely let the ink dry on the Loper ruling before mounting a challenge to IRS guidelines designed to curb what it calls “abusive basis-shifting” by partnerships. Last Wednesday, a lawyer for the IRS commissioner wrote to a federal appeals court contesting the Tribune challenge and pointing out that the agency had not relied on Chevron in its determination.
The Tribune company, the letter said, tried “to abuse federal tax rules to avoid a prodigious tax bill when it sold the Chicago Cubs and related assets. That ran afoul of, among other things, the partnership anti-abuse rule, [which] is supported by a long and unbroken history of judicial doctrines and congressional enactments empowering the IRS to combat the kind of chicanery attempted here.”
The IRS seems to have a solid case here, but that’s not the point. The point is that the agency will be forced to divert more of its hard-won and embattled resources to fend off the coming firehose of legal actions. “There’s such a long list, especially when you start talking about small businesses,” Galle says. Major law firms, Dale points out, have been reaching out to clients and holding webinars on what these rulings might mean for them. (This one highlights various “opportunities” and “avenues for challenge.”)
Lawmakers, too, have taken a keen interest in weaponizing Loper. Also last Wednesday, House Republican committee chairs sent letters to a host of agencies and Cabinet heads—including Treasury Secretary Janet Yellen—asking them to describe how Chevron‘s demise will affect their rulemaking. “We’ve already seen how frequently federal agencies will abuse their authority,” House Majority Leader Steve Scalise (R-La.) said in the announcement. “We intend to ensure agencies are held accountable following the court’s ruling and observe the proper checks on their power.”
“The big picture to me is the court grabbing power,” says Steven Rosenthal, who drafted tax law for Congress as a former staff attorney for the bipartisan Joint Committee on Taxation. “If that goes unchecked, it vastly diminishes the ability of Congress to write statutes and the executive branch to administer them. Everything becomes an interpretive question to be resolved by the courts.”
Justice Elena Kagan had a similar reaction. The Loper majority “flips the script,” she wrote in her scathing dissent (see page 82). “A rule of judicial humility gives way to a rule of judicial hubris…The majority disdains restraint, and grasps for power.”
Tax is a peculiar beast. Lawmakers, recognizing that they often have no clue what they’re doing, give the IRS and Treasury Department an unusual degree of statutory authority to craft workable tax rules and “fill in the details,” as Chief Justice John Roberts wrote for the Loper majority. (See page 17.)
“When the best reading of a statute is that it delegates discretionary authority to an agency,” Roberts wrote, the court’s role is “to effectuate the will of Congress subject to constitutional limits.” These last four words, Rosenthal fears, may signal the court’s future willingness to rule that Congress is delegating more of its power to an agency than the Constitution allows.
Justice Kagan wrote in her Loper dissent that the majority, in killing Chevron, had revived a legal test from the 1944 case Skidmore v. Swift, which held that “agency interpretations ‘constitute a body of experience and informed judgment’ that may be ‘entitled to respect,’” she wrote, but, “If the majority thinks that the same judges who argue today about where ‘ambiguity’ resides [in statutory language] are not going to argue tomorrow about what ‘respect’ requires, I fear it will be gravely disappointed.”
Indeed, the issue for the IRS is that lawyers for corporations and ultrawealthy taxpayers are already starting to throw spaghetti at the wall to see what will stick.
Every time the IRS moves to close an abusive loophole, it is “interpreting the statute to say that can’t be what Congress meant,” Galle told me. Such interpretations, he says—which would include the aforementioned partnership guidelines and the IRS’s warnings about wealthy taxpayers claiming “inappropriately large deductions” for conservation easements—are now more vulnerable to legal challenges.
The justices “had the hubris to believe that they alone can solve problems. They interpret the Constitution in a way that that leaves our government in disrepair.”
Let’s not forget that the IRS has only just begun to recover from decades of Republican-imposed shortfalls, and is still a long way from being fully back on track. “It’s hard to even fathom how far behind their rulemaking is,” says Galle, who is interested in rules around charitable giving. The IRS, for example, has long been mulling rules for donor advised funds, “the new kind of pet charities of a certain group of rich people,” he says. The agency “was supposed to create those rules in 2009, and they haven’t even proposed some of them yet.”
Galle also foresees “upstream pressure” on “the drafters and the general counsel’s office” to make rules that are more resilient to litigation—“which the IRS is not staffed for: They have kind of had their hands over their eyes and their fingers in their ears to warnings that the anti-regulatory tide is eventually going to pull them out to sea.”
Rosenthal finds the notion of so much judicial intervention hard to stomach. If Congress doesn’t have the capacity to deal with the intricacies of tax, he says, “the courts are even worse positioned. Each justice has, like, three or four clerks who are three years out of law school. Congress at least has technical experts like myself—lawyers and economists and others.”
“The court doesn’t have any of those facilities,” Rosenthal continues. “They just had the hubris to believe that they alone can solve problems. They interpret the Constitution in a way that that leaves our government in disrepair, and I think that’s by design. I think that’s what they want.”
Dale predicts the rulings will result in a year or two of gridlock in the federal courts, at which point “Chief Justice Roberts is going to say, this is a terrible problem and in order to allow people to have their rights determined, we need more federal judges. And the Congress is going to say okay. And so we’re going to have an enlargement of the federal judiciary, all of whom serve for life terms.”
If that happens, Dale says, whomever happens to be president will have the opportunity to make lots and lots of appointments, and “we’ll see the policy impact for 40 or 50 years.”
