The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration

The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration

April 8, 2024
The Possible Elimination of Chevron Deference: Potential
Implications for Tax Revenue and Administration
The Supreme Court has heard oral argument in the cases
general and brief, so the methods to allocate profits are
Loper Bright Enterprises v. Raimondo and Relentless v.
contained in Treasury regulations. See CRS In Focus
Department of Commerce. The cases challenge the
IF12524, Corporate Taxation: Profit Shifting, Transfer
constitutionality of a judicial doctrine known as Chevron
Pricing, and Cost Sharing, by Jane G. Gravelle.
deference, which takes its name from the 1984 case
Chevron U.S.A., Inc. v. Natural Resources Defense Council.
One method of profit shifting is cost sharing, where a U.S.
This In Focus addresses some potential consequences for
firm’s foreign subsidiary makes a buy-in payment to
tax administration, including effects on revenue, costs of
existing technology, then shares in the costs of further
tax administration, and fairness and certainty for taxpayers,
development for the right to a share of future profits.
if Chevron were overruled.
In the 2019 case Altera Corp. v. Commissioner, Altera
Loper Bright Enterprises v. Raimondo and Relentless v.
challenged the 2003 Treasury regulation requiring related
Department of Commerce could allow the Court to overturn
companies engaged in cost sharing to also share the cost of
Chevron deference, which requires courts to defer to an
stock-based compensation. The Ninth Circuit, applying
agency’s reasonable interpretation of an ambiguous federal
Chevron, found that Section 482 was silent regarding the
statute that the agency administers. See CRS Legal Sidebar
method Treasury is to use to make allocations based on
LSB11061, Chevron at the Bar: Supreme Court to Hear
stock-based compensation and that Treasury’s choice of a
Challenges to Chevron Deference, by Benjamin M.
method was a reasonable interpretation of the statute. If
Barczewski and CRS Report R44954, Chevron Deference:
Chevron were overruled, and if a future court adopted a
A Primer, by Benjamin M. Barczewski for additional
different interpretation of Section 482, it could result in
background on Chevron deference.
rulings that favored plaintiffs like Altera and, therefore,
considerably reduce federal revenues.
Prior to 2011, not all lower courts agreed that tax
regulations were eligible for Chevron deference. In 2011,
Tax Administration
however, the Supreme Court resolved the disagreement and
Separate from influencing litigation outcomes, changes to
held that tax regulations were eligible for Chevron
Chevron deference could also affect how agencies interpret
deference in Mayo Foundation for Medical Education and
statutes when they promulgate regulations. Treasury may
Research v. United States.
have to rewrite its regulations more often to match statutory
interpretations provided by the courts. One survey found
Potential Revenue Consequences
that 88% of agency rule drafters either “agreed” or
The federal tax code is complicated, and its subsequent
“somewhat agreed” that Chevron made them more willing
interpretation often requires the issuance of federal
to adopt “a more aggressive interpretation.” The loss of
regulations. Those regulations are crucial to determining tax
Chevron deference, therefore, might lead Treasury to write
liability, especially for businesses and corporations.
more taxpayer-friendly original regulations, which could
Seemingly subtle differences in these interpretations can
lead to less revenue.
have substantial effects on federal revenues.
A study of the shift to the broad application of Chevron
In general, challenges to Treasury regulations are most
deference to tax regulations in 2011 identified specific
common where taxpayers contend they should owe less tax.
changes in how those regulations were written. According
Where those challenges are successful, they tend to reduce,
to the author, Treasury’s rulemaking statements began to
rather than increase, federal tax revenue. If changes to
focus more on policy issues and to engage more with public
Chevron make it easier for taxpayers to successfully
comments. The shift to Chevron also appears to have
challenge Treasury regulations, therefore, that could result
increased incentives to use the Administrative Procedure
in lower revenues than Treasury would otherwise collect.
Act’s (APA’s) notice and comment rulemaking, which may
make some interpretations eligible for Chevron deference.
An Illustration: Cost-Sharing Rules for
The Internal Revenue Service (IRS) also changed its
Multinational Firms
manual to eliminate the statement that most regulations are
Profit shifting by multinationals is estimated to cost tens of
interpretive and not subject to procedural requirements
billions of dollars in corporate tax revenue, as discussed in
under APA. These findings suggest that Treasury devoted
CRS Report R40623, Tax Havens: International Tax
more resources to promulgating regulations once tax
Avoidance and Evasion, by Jane G. Gravelle. The statute
regulations were held to be eligible for Chevron deference.
governing the allocation of income and deductions,
Treasury may believe its use of notice and comment
contained in Section 482 of the Internal Revenue Code, is
rulemaking procedures increases its chances of receiving
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The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration
judicial deference and prevailing in challenges to its
interpretation of the TCJA under a future Administration,
regulations.
which may mean that tax regulations can shift from
Administration to Administration.
An Illustration: The Clean Hydrogen Production
Credit Proposed Rulemaking
Congress might consider whether eliminating Chevron
A tax credit for the production of clean hydrogen was
deference would make tax administration more or less fair
enacted as part of P.L. 117-169 (commonly referred to as
to taxpayers. Critics of Chevron have argued that agencies
the Inflation Reduction Act, IRA) to provide an incentive
are not impartial, and that it is unfair for an agency to both
based on the amount of hydrogen produced, the lifecycle
interpret a statute and enforce it. However, overruling
CO2 equivalent emissions rate of the hydrogen through the
Chevron may increase the odds that different courts come
point of production (well-to-gate), and other factors. The
to different conclusions as to the meaning of the tax code,
act specified a general definition and model for calculating
because courts may be more likely to disagree about the
lifecycle greenhouse gas emissions and delegated to the
best meaning of a statute than whether the statute is
Secretary of the Treasury the authority to produce
ambiguous. In this scenario, similarly situated taxpayers
additional necessary regulations.
could receive different treatment (violating the economic
principle of horizontal equity).
Treasury issued a notice of proposed rulemaking on
December 26, 2023. The proposed rule addresses how to
An Illustration: The Clean Hydrogen Production
determine life cycle greenhouse gas emissions and how
Credit Taxpayer Comments
taxpayers may use energy attribute certificates (EACs) to
As described in the previous illustration, taxpayers
qualify for the credit when using grid electricity. Treasury’s
producing hydrogen at qualified clean hydrogen production
interpretation of the rules for a qualifying EAC includes a
facilities may receive a credit based on a variety of
requirement that carbon-free sources must represent new
factors—including the amount of hydrogen produced and
capacity (commonly referred to as additionality). Public
the lifecycle CO2 equivalent emissions rate of the hydrogen.
comments were extensive and have suggested that this
Implementation of this provision was delegated largely to
interpretation may limit the use of the tax incentive and
the Secretary of the Treasury, and a notice of proposed
hinder the development of the clean hydrogen industry.
rulemaking was published on December 26, 2023. During
the comment period, which ended on February 26, 2024,
If Treasury adopts the proposed rulemaking as a final rule,
over 28,000 written comments were submitted.
some taxpayers may challenge that rule as inconsistent with
the Inflation Reduction Act itself. Treasury’s explanation
Comments on proposed regulations serve multiple
for its interpretation, including its engagement with and
purposes, including identifying unclear or confusing
response to public comments, might support an argument in
language and revealing effects that may not have been fully
favor of Chevron deference under current law. If Chevron
understood by those drafting the regulations. The extent to
were overruled or limited, Treasury might have to
which agencies feel compelled to respond to and
demonstrate not only that its interpretation was reasonable,
incorporate comments is driven by a complex set of factors,
but that it had adopted the best interpretation of the IRA,
including whether a court would consider the comment
increasing the potential that a court would require a
“significant” and whether ignoring the comment could be
different interpretation.
grounds by itself for a court to vacate the regulations.
Included in an agency’s calculus is whether the regulation
Taxpayer Certainty and Fairness
is likely to receive judicial deference, because an agency
Treasury regulations can help taxpayers understand their
may rely on its response to comments to demonstrate that
tax obligations. When enacted tax changes are made
its interpretation of a statute is reasonable. Although there
effective on short notice, Treasury and the IRS issue
are multiple incentives for agencies to address public
preliminary notices and proposed regulations that indicate
comments, it is possible that if Treasury could no longer
what the final regulations may look like. (Preliminary or
rely on Chevron deference, it could decline to use notice-
proposed regulations are generally subject to public
and-comment rulemaking to interpret provisions like this,
comment before they become final.) The importance of
or it could pay less heed to the many issues raised by
preliminary regulations was illustrated in two recent major
industry experts and others in the comments on the
tax reforms, P.L. 115-97 (from 2017, commonly referred to
proposed clean hydrogen regulations. Although Congress
as the Tax Cuts and Jobs Act or TCJA) and the IRA.
has plenary power over taxation and could supersede
Chevron by prescribing its requirements directly in
Among other changes, the TCJA disallowed or scaled back
legislation, as a practical matter, Congress may not
a number of deductions, revised international tax rules,
currently have the expertise to legislate a clear rule in every
altered cost-recovery provisions, reduced the corporate tax
tax situation that Treasury currently addresses through
rate, and allowed a pass-through deduction for
regulation.
unincorporated business. To the extent these provisions of
the TCJA are ambiguous, Chevron deference makes it more
Jane G. Gravelle, Senior Specialist in Economic Policy
likely that Treasury can successfully defend the regulations
Donald J. Marples, Specialist in Public Finance
that it promulgates to implement them. In this way,
Benjamin M. Barczewski, Legislative Attorney
Chevron may support continuity and predictability for
taxpayers. On the other hand, Chevron deference also
IF12630
protects Treasury’s discretion to advance a different
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The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration

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https://crsreports.congress.gov | IF12630 · VERSION 1 · NEW