In a recent article, my colleague Gray Edmondson covered the recent Supreme Court case, Loper Bright[1], and the demise of the Chevron Doctrine.[2] The Loper Bright case was handed down by the Supreme Court on June 28, 2024. As Gray explains in his article, the Chevron case has to do with determining the validity of agency regulations, with the Court often deferring to the agency, known as “Chevron deference” where the statute is silent or ambiguous with respect to the specific issue, and the agency’s answer is based on a permissible construction of the statute.[3] In Loper Bright, the Court made it clear that “Chevron is overruled” and ambiguous statutes are now to be interpreted by the Courts with agencies no longer having the benefit of “Chevron deference”.[4]
In his article, Gray discusses the Court’s opinion and some possible effects/consequences of it, some of which may be far reaching and open the door to a whole new area of litigation surrounding various aspects related to agency regulation.
It looks like the floodgates are already opening with regard to some of those consequences as Loper Bright has been cited in a letter to the United States Court of Appeals for the Seventh Circuit in the Tribune Media Co. v. Commissioner case, currently on appeal from the Tax Court, as well as in a letter to the United States Court of Appeals for the Eighth Circuit in the 3M Co. v. Commissioner case, also currently on appeal from the Tax Court.[5]
The Tribune case involves an alleged disguised sale[6] of the Chicago Cubs in 2009. While the details of the transaction are not the focus of this article, the taxpayer, Tribune, a Chicago newspaper and media company, owned the Chicago Cubs. Tribune sold the franchise to the Ricketts family in 2009 through the use of a newly formed partnership structure. Tribune and the Ricketts formed an LLC with Tribune contributing the franchise and the Ricketts contributing cash which was subsequently distributed to Tribune. As part of the transaction, the LLC took on additional debt in the form of both senior level and subordinated debt. The IRS deemed the whole structure to be a disguised sale under the anti-abuse rules of IRC §701 and the related regulations. The Tax Court partially agreed but held that the senior level debt met the requirements of IRC §707(a)(2)(B) which provides an exception to the disguised sale rules for certain debt financed distributions. However, the Tax Court ruled that the subordinated debt was actually equity, and as such, did not meet the exception since it was not debt in the first place. As a result, $425M of the total $714M of debt was nontaxable, leaving the balance taxable. The case is generally seen as a huge taxpayer victory even though Tribune didn’t get the result they wanted on the subordinated debt but were able to avoid the leveraged partnership transaction being totally disregarded under the anti-abuse rules. It was the IRS that appealed the case to the Seventh Circuit.
So how does Loper Bright and the end of “Chevron deference” play into the Tribune case? The regulation at issue in the Tribune case is Treas. Reg. §1.701-2 which is the known as the “anti-abuse” rule for Subchapter K governing partnership taxation. The Regulation was promulgated pursuant to authority granted to the Treasury under IRC §7805(a) which states:
Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.[7]
Counsel for Tribune has penned a letter to the Court asking the Court to overturn Treas. Reg. §1.701-2 based on Loper Bright and the fact that Chevron deference no longer applies. In the letter, Tribune noted that the government was not expressly relying on “Chevron deference” in its defense of the regulation but went on to say that the anti-abuse rule was an “extraordinarily broad assertion of agency authority.” Accordingly, in light of Loper Bright, the Court should carefully consider whether the Treasury was within its permissible statutory authority in issuing such a broad regulation.
In its response, counsel for the IRS refutes the fact that the Treasury has relied on “Chevron deference”, a fact which Tribune admits. The IRS contends the regulation at issue is squarely within its authority under the economic substance doctrine, first seen in Gregory v. Helvering, 293 US 465 (1935) and subsequently codified in IRC §7701. Further, the IRS contends the regulation is within the scope of authority granted to the Treasury in the Revenue Act of 1918, and is essential to the efficient and fair administration of the tax laws, noting that the IRS “must be able to exercise its authority to meet changing conditions and new problems.”[8]
In the second case, 3M, the regulation at issue is Treas. Reg. 1.482-1(h)(2) dealing with when a taxpayer may take into account foreign legal restrictions for determining the arm’s-length amount in a transaction between controlled taxpayers. The Tax Court’s opinion in the 3M case was a full Tax Court opinion, meaning all 17 judges joined in. The decision was close, being a 9-8 split in favor of the IRS. The majority held the regulation was valid due to Chevron deference, using the term “Chevron Step-Two”[9]. 3M appealed the case to the Eighth Circuit where it is now pending. In light of Loper Bright, counsel for 3M has penned a letter to the Court noting that the case “vitiates the Tax Court plurality’s only grounds for upholding the Treasury’s interpretation of IRC §482” and thus warrants a reversal.
It will be interesting to see how both of these cases play out. I have no doubt this is only the first of many similar issues and challenges to agency regulations that will arise in light of Loper Bright. With the death of Chevron, we’ll likely see much more litigation surrounding agency regulations (not just Treasury regulations) and a variety of nuanced issues related to the same, many of which may raise the issue of constitutional delegation limits of Congress.[10] Time will tell!
[1] Loper Bright Enterprises v. Raimondo, 2024 WL 3208360 (U.S. June 28, 2024).
[2] https://esapllc.com/goodbye-chevron-loper-bright-enterprises-2024/.
[3] Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 831 (1984).
[4] Loper, 2024 WL 3208360 (U.S. June 28, 2024).
[5] 3M Co. v. Commissioner, 160 TC 3 (2023).
[6] In general, a disguised sale is when a partner contributes assets to a partnership and there is a related transfer of assets by the partnership to that partner or another partner. See IRC §707 and related regulations for when such a transaction is taxable.
[7] IRC §7805(a).
[8] Bob Jones Univ. v. US, 461 US 574 (1983).
[9] See Gray’s Edmondson’s article for a discussion of Chevron: https://esapllc.com/goodbye-chevron-loper-bright-enterprises-2024/.
[10] Such as the on delegation doctrine of Article One, Section 1 of the US Constitution and J.W. Hampton, Jr. & Co. v. U.S., 276 UY.S. 394 (1928). As Gray notes in his article, this effectively requires Congress to set forth an “intelligent principal” to be applied in regulations.
