Tax Cliff and Chevron’s Demise Will Give Litigation a Boost

The upcoming year promises more Tax Cuts and Jobs Act-related tax controversy, particularly given the US Supreme Court overruled Chevron deference and returned the world to a state where courts, not federal agencies, are the primary interpreters of statutes.

Layer onto that the Supreme Court’s decision in Corner Post, Inc. v. Board of Governors, which confirmed that the statute of limitations for challenging regulatory action doesn’t begin until a plaintiff suffers an injury from the regulation, and the landscape is ripe for additional regulatory validity challenges.

We expect to see more challenges to Treasury regulations in 2025, including challenges based on the regulations not being the best interpretation of the statute, impermissible retroactivity, and failure to follow notice and comment procedures.

Winning regulatory invalidity alone, however, may not be enough to sustain a tax position. As can be seen in recent TCJA cases, the IRS is turning to the economic-substance doctrine to sidestep its regulatory validity conundrum. For the coming year, tax professionals should anticipate the following.

More wins on regulatory invalidity. We expect additional victories following the taxpayer-favorable opinions and orders issued on TCJA regulatory challenges in 2023 and 2024, including Varian Medical Systems v. Commissioner, FedEx Corp. v. US, and Liberty Global, Inc. v. US.

Because these types of regulatory validity challenges have been bolstered by the Supreme Court overturning the Chevron doctrine in Loper Bright Enterprises v. Raimondo, there is an opportunity for stronger and more effective challenges to regulations.

We anticipate more challenges, more appeals to circuit courts, and in theory circuit splits over the appropriate treatment because the Loper Bright decision allows courts to exercise their own independent judgment when interpreting statutory provisions. Given the changes in the landscape, we expect taxpayers to pursue opportunities on their returns, including filing protective refund claims based on regulatory invalidity.

More IRS challenges based on the economic-substance doctrine. In the face of stricter statutory interpretation and tighter enforcement of the Administrative Procedure Act, the IRS turned to this doctrine to challenge taxpayer transactions where the IRS statutory interpretation position is unconvincing and its regulations deficient.

This can be seen in Liberty Global, where the IRS raised the economic-substance doctrine as an alternative way to challenge the taxpayer’s position. It succeeded—the district court, after invalidating the regulation, ruled against Liberty Global on the basis that its transaction lacked economic substance.

Liberty Global appealed to the US Court of Appeals for the Tenth Circuit, and November’s oral arguments focused on the economic-substance doctrine issue—particularly how to interpret the relevancy requirement in Section 7701(o). The IRS is taking the same type of approach in Siemens USA Holdings, Inc. v. Commissioner, which is docketed in US Tax Court, in an attempt to avoid the tax effects of the transaction if its regulation is held to be invalid.

As the Tenth Circuit is doing, the Tax Court also must grapple with how to interpret the relevancy requirement in Section 7701(o). We anticipate other courts will articulate an actual test for relevancy based on the foundational principles for relevancy found in case law, including:

• Respecting a taxpayer’s choice among options the tax code otherwise allows
• Looking to the text of the applicable statute to see if it uses a term that requires in inquiry into economics or purpose, such as the term “reorganization” in Gregory v. Helvering
• Permitting tax outcomes required by the tax code’s plain language

More disputes regarding the timing of taxpayer injuries in regulatory invalidity cases. Under Title 28 of US Code Section 2401(a), civil action against the government must begin within six years “after the right of action first accrues.”

The Supreme Court’s July decision in Corner Post confirmed that the six-year statute of limitations is triggered when a plaintiff suffers an injury from the regulation, not when the regulation becomes final.

With the TCJA’s corresponding regulations getting farther out from the date promulgated, taxpayers may need to rely on Corner Post to rebut IRS arguments that a regulatory invalidity claim is barred by statute.

The standard enunciated in Corner Post is important for taxpayers, given that the Anti-Injunction Act prevents facial challenges to most regulations—taxpayers typically need an IRS adjustment before they can challenge a regulation. Because the six-year statute of limitations has come to the forefront, however, taxpayers should continue to expect this type of procedural challenge from the IRS.

In sum, it’s going to be an interesting year.

The case is Loper Bright Enters. v. Raimondo, 2024 BL 221307, U.S., 22-451, 6/28/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Joy Allison Williamson is partner at Baker McKenzie in Dallas office focused on federal tax controversies, with an emphasis on transfer pricing.

Amanda Kottke is partner at Baker McKenzie in Palo Alto, Calif., whose practice involves all stages of federal income tax disputes.

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