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Archive for June, 2024

How May Chevron’s overruling Impact Treasury Regulations?

Posted by William Byrnes on June 28, 2024


The U.S. Supreme Court today issued its expected overruling of the Chevron doctrine, which has been relied upon in 70 past Supreme Court decisions and approximately 17,000 in the Appellate and District courts.[1]

Brief Overview of the Chevron Doctrine

In a landmark unanimous decision in 1984, the Supreme Court established the Chevron doctrine. Only six justices participated due to the recusal of Justices Rehnquist, O’Connor, and Marshall.[2] The case, Chevron U. S. A. v. Natural Resources Defense Council, concerned whether a regulation issued by President Ronald Reagan’s administration’s EPA that, in the perspective of environmental groups, watered down the requirements of the Clean Air Act Amendments of 1977, permissibly defined a statutory term. The previous administration’s EPA regulation defined the term differently and had the support of environmental groups.

The Supreme Court, analyzing the statute’s language, ascertained that Congress did not intend a particular regulatory definition and instead intended to grant the EPA broad scope to effectuate the policies of the Clean Air Act.[3] The Supreme Court stated that policy arguments regarding regulatory choices “are more properly addressed to legislators or administrators, not to judges.”[4] When a court determined that Congress has not spoken directly on a statutory issue (the first step of analysis), then the Chevron doctrine established a threshold of deference in favor of an Executive branch agency’s regulatory choices if (the second step of analysis) – (a) the regulatory scheme is technical and complex, (b) the agency considered the matter in a detailed and reasoned fashion, and (c) the decision involves reconciling conflicting policies.[5]

Today’s Decision Overruling the Chevron Doctrine

On June 28, 2024, the Supreme Court published its decision for Loper Bright Enterprises v. Raimondo, Secretary of Commerce, known colloquially as the ‘New Jersey Fisheries case’.[6] A six-justice majority held that the Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and thus, courts may not defer to an agency’s interpretation of the law simply because a statute is ambiguous.[7] A three-justice dissent defended the Chevron doctrine’s allocation of deference to the executive branch based on the presumption that Congress favors an agency exercising the discretion allowed by a statute rather than the courts.[8]

In 1976, Congress promulgated the Magnuson-Stevens Fishery Conservation and Management Act (the “MSA”) to address overfishing in U.S.-controlled waters.[9] The MSA established eight regional fishery management councils each comprised of members of the regional fishing industry, the regional states, and the federal regulatory agency National Marine Fisheries Service (“NMFS”).[10] The MSA requires that fishing businesses allow an observer on fishing voyages to collect data necessary for the conservation and management of the fishery. The MSA specifies three industry groups that must cover the costs of the observer program, of which only one is a regional fishery management council (North Pacific).

In 2020, the NMFS published a final rule initiated by the New England Fishery Management Council (“NE-FMC”)that required New England-based fishing businesses to cover the costs of monitoring the Atlantic herring fishery when the NMFS elected not to do so.[11] The NMFS estimated that such costs would be approximately $710 daily, reducing annual returns to the vessel owner by up to 20 percent.[12] The New Jersey Fisheries case involved herring fishing family businesses who argued the NMFS is not authorized by the MSA to impose these costs upon them because their businesses fall within the non-specified NE-FMC.  

The majority opinion provides an overview of the history of judicial interpretation, beginning with the seminal Marbury case, continuing through the New Deal period, the 1946 enactment of the Administrative Procedures Act, and ending with the present line of Chevron cases.[13] A foretelling statement regarding deference is made in its overview:

“Respect,” though, was just that. The views of the Executive Branch could inform the judgment of the Judiciary, but did not supersede it.[14]

The majority noted that the APA explicitly directs a reviewing court to decide all relevant questions of law, interpret constitutional and statutory provisions, determine the meaning or applicability of terms of an agency’s actions, and set aside agency action, findings, and conclusions not per a statute.[15] The majority concludes: “The deference that Chevron requires of courts reviewing agency action cannot be squared with the APA.”[16]

Thus, the majority decision was: “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority, as the APA requires. Careful attention to the judgment of the Executive Branch may help inform that inquiry. And when a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it. But courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”[17]

Impact on Treasury/IRS Regulations?

On April 8, 2024, the Congressional Research Service (the “CRS”) published an In Focus article regarding “The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration”.[18] The CRS stated that without Chevron’s deference, the 2019 Altera regarding the regulations for cost-sharing arrangements may have been decided in favor of the taxpayer.[19] You may find my previous articles about the Altera decision by linking here, as well as my 2017 article about Treasury regulation jurisprudence in light of the Amazon decision by linking here.

The most telling statement of the CRS is that without Chevron deference, Treasury may draft more taxpayer-friendly regulations. Why? CRS states that a survey found that:

88 percent of agency rule drafters either “agreed” or “somewhat agreed” that Chevron made them more willing to adopt “a more aggressive interpretation.”

Well, I must shut down now to prepare our Shabbat meals. But on Sunday, I’ll add more thoughts and analysis about the end of Chevron on tax regulations and, in particular, for transfer pricing.  

[1] Adam Liptak, Supreme Court Imperils an Array of Federal Rules, NY Times, June 28, 2024. See https://www.nytimes.com/live/2024/06/28/us/supreme-court-chevron/heres-the-latest-on-the-decision?

[2] Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984).

[3] Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 839, 104 S. Ct. 2778, 2780 (1984).

[4] Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 864, 104 S. Ct. 2778, 2792 (1984).

[5] Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 865, 104 S. Ct. 2778, 2792-93 (1984).

[6] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882 (June 28, 2024).

[7] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *1 (June 28, 2024).

[8] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *114 (June 28, 2024).

[9] Pub. L. 94-265 (1976), 90 Stat. 331.

[10] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *18 (June 28, 2024).

[11] 85 FR 7414, 7414. 

[12] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *20-21 (June 28, 2024).

[13] Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803); The Administrative Procedure Act (APA), Pub. L. 79–404 (1946), 60 Stat. 237.

[14] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *26 (June 28, 2024).

[15] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *32-33 (June 28, 2024).

[16] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *38 (June 28, 2024).

[17] Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882, at *61-62 (June 28, 2024).

[18] See https://crsreports.congress.gov/product/pdf/IF/IF12630/2.

[19] See William Byrnes, An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’, Kluwer International Tax Blog (June 14, 2019),  https://kluwertaxblog.com/2019/06/14/an-arms-length-result-is-not-simply-any-result-that-maximizes-ones-tax-obligations/.

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Supreme Court holds constitutional tax on U.S. shareholders for imputed undistributed income of foreign corporations but limits holdings’ impact on future taxes.

Posted by William Byrnes on June 20, 2024


At the end of 2017, Congress passed a once-off Mandatory Repatriation Tax (the “MRT”) of 8 to 15.5 percent of the undistributed total accumulated income of American-controlled foreign corporations over the past thirty years (since 1987).[1] This accumulated income, if distributed, would be taxed in the hands of the American shareholders. However, because Congress cannot force a foreign corporation to repatriate income, Congress instead imposed the tax by imputing pro rata the accumulated income to American shareholders who owned at least 10 percent of a foreign corporation’s shares.

A couple filing jointly as married taxpayers, Charles and Kathleen Moore (the “taxpayer”), invested in the American-controlled foreign (India) corporation KisanKraft.  From 2006 to 2017, KisanKraft earned profits supplying farm equipment to customers in India but did not distribute any of it to its American shareholders. The taxpayer paid the tax and then sued for a refund, alleging that the MRT violated the Direct Tax Clause of the Constitution because it was an unapportioned direct tax on their property (the shares of KisanKraft stock). The taxpayer also argued that income should be ‘realized’ to be taxed. The Federal District Court dismissed the suit, and the Ninth Circuit Court of Appeals affirmed that dismissal.

In Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711 (S.Ct. June 20, 2024) (slip opinion from Court’s website here), in a five to two decision, the five Justice majority held the MRT was an indirect tax on income and thus constitutional.[2] Justice Kavanaugh authored the 24-page majority opinion, joined by Chief Justice Roberts and the Court’s three liberal Justices (Sotomayor, Kagan, and Jackson). Justice Jackson also wrote an ancillary concurring opinion.

The Court found that the MRT taxed the ‘realized’ income of the underlying foreign corporation KisanKraft, which the MRT attributed pro rata to the American shareholders. The five-judge majority stated that the Court’s longstanding precedents confirm that Congress may attribute an entity’s realized but undistributed income to its shareholders and then tax the shareholders on their portions of that undistributed income. In an interesting historical anecdote, the Court cited that Congress passed an 1864 income-tax law that taxed shareholders on “the gains and profits of all companies.”[3] 

Also very interesting is what the Court did not decide upon. The Supreme Court limited its holding only to entities treated as pass-throughs. Specifically, the Court stated that the opinion does not authorize a hypothetical congressional effort to tax an entity and its shareholders on the same undistributed income realized by the entity.  Also, the Court cautioned that its decision does not address the parties’ disagreement over whether realization is a constitutional requirement for an income tax.

Justice Barrett, joined by Justice Alito, authored a 17-page concurring nonconcurrence that concurs only because the taxpayer did not challenge the constitutionality of Subpart F. Justice Thomas wrote a 33-page dissenting opinion joined by Justice Gorsuch. Had the taxpayer challenged the constitutionality of Subpart F, this may well have been a 5 to 4 split decision that set up a future constitutional challenge of Subpart F imputation of income wherein the taxpayer prevails.

Justice Barrett’s concurrence presented contrarian arguments that will certainly be the focus of many tax professors’ wrath and scowls: “Subpart F and the MRT may or may not be constitutional, nonarbitrary attributions of closely held foreign corporations’ income to their shareholders.”[4] The Justice first parsed “derived” and “realized”.[5] Then she diverged to set up the contrarian arguments.

She states that the government conceded “…that a tax on the “total value of” the shares “at a particular point [in] time” is a “quintessential tax on property” that must be apportioned.” She continued with the government’s approach: “… looking at property value across two points in time makes a difference, … because then the tax targets appreciation rather than the asset’s value. As the Government sees it, Congress may tax without apportionment “all economic gains” measured “‘between two points in time.’” And the increase in value between Time A and Time B is “income.””

At this point, Justice Barrett delivers the punch line: “The Government is unable to cite a single decision upholding an unapportioned tax on appreciation. … That is no surprise, because our precedent forecloses the Government’s argument.” Then she lays out the contrarian argument:[6]  

In upholding the tax, the Ninth Circuit opined that “[w]hether the taxpayer has realized income does not determine whether a tax is constitutional.” 36 F. 4th 930, 935 (2022). In its view, the “Supreme Court has made clear that realization of income is not a constitutional requirement.” Id., at 936. The Ninth Circuit misread our cases. Contrary to its assertion, this Court has “never abandoned the core requirement that income must be realized to be taxable without apportionment.”

Justice Barrett concludes: “In sum, realization may take many forms, but our precedent uniformly holds that it is required before the Government may tax financial gain without apportionment. … None of these cases contradicts Macomber’s admonition that Congress cannot “look upon stockholders as partners . . . when they are not”; Congress may not “indulge the fiction that they have received and realized a share of the profits of the company” when they have not.”[7] Justice Thomas, as the author of the 33-page dissent, is more pointed: “…the majority’s “attribution” doctrine is an unsupported invention.”[8] He analyzes attempts to pass federal tax laws and their constitutionality from the nation’s founding through the Sixteenth Amendment, finding that Sixteenth Amendment “income” is only realized income. He states in pertinent part: “The Court strains to uphold the Mandatory Repatriation Tax without addressing whether the Sixteenth Amendment includes a realization requirement, the question we agreed to answer in this case. The majority starts by surveying a scattered sampling of precedents—mostly about tax avoidance—to invent an “attribution” doctrine that sustains the MRT.”

[1] I.R.C. §§965(a)(1), (c), (d).

[2] U.S. Const. §8, cl. 1 and 16th Am.

[3] Rev. Act of 1864, § 117, 13 Stat. 282. 

[4] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *66-67 (June 20, 2024).

[5] Moore  v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *49 (June 20, 2024).

[6] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *52-53 (June 20, 2024).

[7] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *60-61 (June 20, 2024).

[8] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *69 (June 20, 2024).

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