Conservative lawmakers and jurists have taken aim at the Chevron doctrine for years. At its most abstract, Chevron gives federal agencies the ability to interpret ambiguous laws, and affords those interpretations a fair amount of deference. But the doctrine’s continuity is at stake in Loper Bright Enterprises v. Raimondo, which the US Supreme Court has taken up this term.
Overturning or gutting Chevron would have profound consequences for tax regulation and practice. Without the deferential standard, courts would no longer be bound to uphold IRS regulations as authoritative interpretations of ambiguous statutes.
The reinterpretation and litigation of issues could mean a generational upheaval in tax law—and substantial loss of tax revenue. Transfer pricing is perhaps the best example of the violence that will be done to tax law if Chevron is overturned.
In the tangle of US tax law, the Chevron doctrine has long been a cornerstone, if largely unspoken, principle. It enables the IRS and Treasury Department to navigate the complexities of real-world transactions and ambiguities of tax legislation, patching over gaps with regulations that courts have given deference.
Most heavy lifting in terms of policy is done through hundreds of pages of regulations promulgated under Internal Revenue Code Section 482.
Transfer pricing is the broad method by which multinational corporations allocate income and expenses across discrete tax jurisdictions. The IRS has developed a complex framework of regulations related to price setting and allocations to prevent tax evasion or avoidance through manipulation of prices. Compliance is determined through increasingly sophisticated examination processes.
The framework required to regulate such nuanced business practices requires IRS interpretation of broad statutory language. Even the arm’s-length standard in valuation—which calls for pricing reflective of what would be charged an unrelated party in the open market—is a creature of regulation.
If the Supreme Court overturns Chevron, such standards would be subject to judicial review. Judges would have to determine whether the IRS interpretation of Section 482 reasonably supports such a standard.
Consequently, the death of Chevron would introduce immediate uncertainty for international tax practices. Multinational corporations would need to assess the degree to which they can rely on existing IRS guidelines in their tax planning. This would almost certainly hamper cross-border trade until certainty could be restored.
If Chevron is overturned, there would be a sudden and immediate uptick in litigation. The IRS would likely find itself recast as a litigant, and efforts to bring massive multinational tax claims to corporations accused of leveraging transfer pricing for tax avoidance could well be brought to a standstill.
The specific case of Microsoft’s alleged $28.9 billion tax bill places a low-end immediate estimated cost for Chevron’s end. The Loper Bright decision will be released before the Microsoft case is resolved—and the former may well render the latter moot.
A post-Chevron future assigns no deference to the regulations Microsoft has been accused of violating. Microsoft could abandon any argument that it was compliant in favor of challenging the propriety of the regulations themselves.
Regulations that clarified and were promulgated under Section 482 and after Chevron may only be valid if a court finds them reasonable—a deference level referred to as Skidmore deference.
Decisions such as those in favor of the IRS against 3M and Coca-Cola last year could be appealed and thrown out or substantially reduced. A rough total of the two decisions and IRS estimates in the Microsoft case means saying goodbye to Chevron could cost taxpayers $30 billion, nearly immediately. That’s roughly the amount the Biden administration calculated it would cost to cancel $20,000 in student debt for all eligible borrowers.
An increased role for the judiciary would also lead to greater variability in tax law interpretation. Rather than speaking in one regulatory voice, the tax authority would be disaggregated.
Judges, at times lacking the expertise of the IRS, wouldn’t necessarily arrive at uniform and broadly consistent views. This patchwork of case law would complicate tax planning and compliance for all taxpayers.
Clear, unambiguous statutes can guide tax policy without the involvement of the judicial system—even in a post-Chevron world. Of course, making such a clarifying effort a reality would require a uniformity of purpose and concerted effort that political concerns all but exclude.
There may be more grist for the policy mill in the IRS and Treasury Department redoubling efforts to issue guidance that stands up to judicial scrutiny without significant deference—policymaking in the shadow of a future reasonableness standard.
If Chevron gives way to Skidmore deference, courts will follow agency interpretations of ambiguous statutes that are persuasive and consistent with previous interpretations. Bolstering the persuasiveness of a regulation may necessitate more robust public consultation and collaboration with industry experts.
The end of Chevron would force major changes for tax law. We either stand on the precipice of immediate transformation or have received our first clear signal that a shift is coming. Either way, this moment should be heeded as a clarion call for preparedness.
Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social
Continue ReadingTo contact the editors responsible for this story: Melanie Cohen at mcohen@bloombergindustry.com; Daniel Xu at dxu@bloombergindustry.com
