How the End of Chevron Deference Reshapes Federal and State Tax Laws

The United States Supreme Court made history on June 28, 2024, by overturning the landmark Chevron USA Inc. v. Natural Resources Defense Council, Inc. decision. In its ruling on Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dept. of Commerce, the Court ended 40 years of judicial deference to agency interpretations of ambiguous statutes. This monumental decision reshapes how courts, agencies, and taxpayers interact with the law.

The Chevron Doctrine: What Was It?

The Chevron doctrine, established in 1984, required courts to defer to agency interpretations if two conditions were met:

1. The statute in question was ambiguous.
2. The agency’s interpretation was reasonable.

This principle aimed to grant agencies flexibility, especially in technical matters. However, critics argued that it gave agencies unchecked power. Proponents countered that it brought stability and expertise to regulatory frameworks.

Key Takeaways from Loper Bright

In Loper Bright, the Supreme Court rejected the Chevron standard. Chief Justice John Roberts, writing for the majority, declared that courts must exercise independent judgment when interpreting ambiguous statutes. He emphasized that deference to agencies without explicit Congressional authorization violates the Administrative Procedure Act (APA).

The Court’s opinion clarified:

1. Courts cannot automatically defer to agency interpretations based on ambiguity.
2. Congress must clearly delegate interpretive authority for agencies to wield substantial influence.
3. Even technical matters require judicial independence in interpretation.

This decision does not establish a new standard of deference. Instead, it mandates that courts independently interpret statutes while considering—but not deferring to—agency guidance.

Federal Implications: IRS and Tax Guidance

The ruling profoundly impacts tax law, where ambiguity is common, and agencies like the IRS have historically played a critical role in interpretation. Moving forward:

• Courts will scrutinize IRS guidance with more rigor.
• Taxpayers and businesses may challenge agency interpretations more frequently.
• The shift could create uncertainty as courts develop their independent frameworks for interpreting technical tax statutes.

For example, IRS regulations and revenue rulings—often relied on for clarity—may now face stricter judicial review.

State-Level Impacts: A Varied Landscape

The effects on state tax systems will depend on how states approached Chevron deference before this ruling:

1. States Following Chevron:
   States that explicitly adopted Chevron or similar standards may face significant disruptions. Taxpayers could challenge longstanding agency interpretations, forcing courts to reevaluate decades of precedent.
2. States With Independent Standards:
   States that developed their own deference standards may see less immediate impact. However, the Supreme Court’s decision will likely embolden taxpayers to test agency guidance.
3. Legislative Responses:
   States may respond by codifying new deference standards, as some have already moved away from Chevron in recent years.

For example, in New York and California, courts have already rejected agency deference in recent tax disputes. These states may see an increase in challenges as litigants leverage Loper Bright to contest unfavorable agency interpretations.

Broader Implications for Taxpayers

This decision marks a turning point in the balance of power between agencies and the judiciary. For taxpayers and businesses, it creates both opportunities and challenges:

1. Opportunities: More chances to challenge unfavorable interpretations of ambiguous statutes.
2. Challenges: Potential instability as courts revisit longstanding agency rules.

Tax advisors and businesses must closely monitor evolving judicial interpretations and adjust their strategies accordingly.

A Call for Clarity

The Supreme Court’s decision places the onus on Congress to provide clearer statutory language and explicitly define agencies’ interpretative powers. For now, taxpayers and tax professionals must navigate a new, uncertain legal landscape.

As courts exercise their independent judgment, the future of tax guidance at both federal and state levels remains in flux. However, one thing is certain: the era of automatic agency deference is over.

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