Second Circuit Applies Loper Bright to Approve a Best Interpretation in Treasury Regulation (8/15/25)

In New Jersey v. Bessent, ___ F.4th ___ (2d Cir. 8/13/25), CA2 here and TN here, the Court sustained the Treasury Regulation denying a federal tax deduction for "charitable" donations where the "donor" received a state or local property tax credit in the amount of 85% to 95% of the amount "donated." The net effect of the credit is that the "donation" was largely a payment of local property tax and, if the federal donation were allowed, would skirt the SALT limitation on the federal deduction of property taxes.

The key part of the opinion for present purposes is the discussion of the merits of the Regulation, referred to in the opinion in administrative law parlance as the Final Rule. The district court sustained the Regulation (Slip Op. 5) "relying on Chevron deference to conclude that the IRS's interpretation of ambiguous statutory language in I.R.C. § 170 is a permissible construction of the statute." (See also Slip Op. 27).

As I discuss below in comments (see JAT Comments ¶ 3) that there is confusion about what Chevron deference did, but for present I simply assume that the district court applied Chevron in some way.

So, New Jersey v. Bessent Court reads its duty under Loper Bright to determine whether the Regulation was the "best" interpretation of the governing statute, without any deference. The Court cites Skidmore once (Slip Op. 29), but only for the generality of Skidmore without relating that generality to its reasoning sustaining the Regulation interpretation. The reasoning of the opinion is the determination that the agency interpretation is, under Loper Bright, the best interpretation.

The Court addresses the issue by deciding that, rather than focus on the elusive subjective donor expectation of benefit (which might make the donation not really charitable in a general sense), an objective test labeled as a "quid pro quo' test, will applies under the statute. (See Slip Op 31-46). Under that objective test, for example, the expectation of a tax deduction from a party other than the donee (e.g., the IRS) is not a quid pro quo that denies the charitable deduction; however, a substantial credit from the party receiving the donation can be a quid pro quo that denies the deduction. Under this test, the state or local tax credit denies the charitable deduction.

I will not discuss the merits of the Court's analysis in getting to the holding that the "donations" in question are not charitable and thus the Regulation states the best interpretation. (I will address that issue in JAT Comments  ¶ 2 below.) Bottom line, the Court holds (Slip Op. 46):

    We conclude that the Final Rule correctly interprets I.R.C. § 170 as applied to Appellants' tax-credit programs and that the IRS did not exceed its statutory authority.n17
   n17 We do not decide today whether the Final Rule's preclusion of a § 170 deduction in instances where the tax credit comes not from the recipient of a gift but from a third-party government exceeds the scope of I.R.C. § 170. See 26 C.F.R. § 1.170A-1(h)(4)(i). Appellants do not argue here that the rule's application to all tax-credit-for-contribution programs (exempting those where the tax credit does not exceed 15% of a contribution) renders the regulation unlawful. "In our adversarial system of adjudication, we follow the principle of party presentation" under which we do not "sally forth each day looking for wrongs to right" but instead "decide only questions presented by the parties." In re TransCare Corp., 81 F.4th 37, 58 (2d Cir. 2023).

JAT Comments:

1. Rigorous Statutory Interpretation. The Court's opinion is that the Regulation is the best interpretation of the "charitable" requirement of § 170. The essence of the holding is that, through rigorous statutory interpretation, it eliminated any ambiguity in the statute permitting it to determine and apply the best interpretation which was the agency interpretation.

Those who followed the trajectory of Chevron deference will recall that, after concerns about Chevron deference which applied only if there were statutory ambiguity, courts inspired by footnote 9 of Chevron began applying the tools of statutory interpretation to, where possible, eliminate the statutory ambiguity. In this sense, courts noising about the command of Loper Bright might just be applying something like the drill under Chevron footnote 9 to eliminate the ambiguity, thus not getting to Step One or stopping at Step One. In other words, it is not clear that the Court in New Jersey v. Bessent would have reached a different conclusion had it applied the Chevron formula. I discuss the continuing role of statutory ambiguity below in JAT Comment ¶ 3.

4. The Best Interpretation. Did the New Jersey v. Bessent Court really determine the best interpretation of the statute? I quoted above the Court's bottom-line holding with the caveat in the footnote (also quoted).  The Court made no attempt to determine whether (i) the Regulation was a correct interpretation of § 170 generally or (ii) whether in these cases (85%-95% state or local tax credit), the Regulation correctly determines that a charitable contribution was not made. I wonder whether the Court was really determining the best interpretation or whether it was deciding much like the Supreme Court decided in United States v. Correll, 389 U.S. 299 (1967), a unanimous opinion authored by Justice Stewart, the Court deferred to the agency regulations interpretation requiring “sleep or rest” to meet the “away from home” statutory text. Correll said (at 306-307).

Alternatives to the Commissioner's sleep or rest rule are of course available. Improvements might be imagined. But we do not sit as a committee of revision to perfect the administration of the tax laws. Congress has delegated to the Commissioner, not to the courts, the task of prescribing “all needful rules and regulations for the enforcement” of the Internal Revenue Code. 26 U. S. C. § 7805 (a). In this area of limitless factual variations, it is the province of Congress and the Commissioner, not the courts, to make the appropriate adjustments. The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner’s regulations fall within his authority to implement the congressional mandate in some reasonable manner.

Perhaps the § 170 Regulation is just a practical interpretation where, within the range of practicality (dare I say permissible), the agency may pick the interpretation (a line-drawing exercise based on practical administrability). This raises the issue of whether pre-Chevron deference, which required ambiguity, but was not based upon ambiguity alone, applies after Chevron's demise. I address that issue lightly in my Federal Tax Procedure Book (Student Ed. 61; Practitioner Ed. 97) and in more detail in my upcoming Tax Lawyer article.

3. Role of ambiguity (aka Equipoise). The word ambiguous is itself ambiguous. Brett M. Kavanaugh, Book Review: Fixing Statutory Interpretation, 119 Harv. L. Rev. 2118, 2118-2119 &2136-2136 n. 41) (2016) (noting (i) "judges often cannot make that initial clarity versus ambiguity decision in a settled, principled, or evenhanded way;" and (ii) it assumes judges can agree on whether statutory text is ambiguous; "judges often cannot make that initial clarity versus ambiguity decision in a settled, principled, or evenhanded way;" and (ii) "it assumes that the line dividing ambiguity from clarity remains the same across (and within) all doctrines "; Ryan D. Doerfler, The "Ambiguity" Fallacy, 88 Geo. Wash. L. Rev. 1110 (2020) ("'ambiguity,' is critically ambiguous.”) The key insight—if that is the right word—of Chevron Footnote 9 and Loper Bright is that rigorous statutory interpretation can eliminate ambiguity, thus permitting the court to apply the best interpretation, regardless of whether that is the agency interpretation. At least most of the time, although Loper Bright claims, falsely, that rigorous statutory interpretation can always eliminate ambiguity, permitting courts to apply the best interpretation. I won't get further into that here but I do address that issue in some detail in an article that will appear in the Spring 2026 edition of the ABA Tax Lawyer. In this regard, I use the term interpretive "equipoise" to mean the same as ambiguity—the inability to determine the "best” interpretation; the word equipoise is familiar in factfinding requiring a default rule (like burden of persuasion) to resolve a case where a key fact cannot be determined. I suggest that the state of equipoise was the real domain of Chevron deference, not requiring deference because ambiguity/equipoise means the best interpretation cannot be determined and a default rule is required. The default rule in both pre-Chevron deference and Chevron deference was to apply the agency interpretation (just as equipoise in factfinding applies a default rule to decide the case).

Often during Chevron's reign, courts commoting about Chevron were really not deferring to a not best agency interpretation over a best opposing interpretation because (i) they were really applying the best agency interpretation masking it as Chevron deference and (ii) in any event, the court citing Chevron determined that the statute text was ambiguous where it could not determine the best or not best interpretation and applied the agency interpretation. The latter phenomenon is not deference to a not best agency interpretation over the opposing interpretation. It is rather a default rule when no best interpretation can be determined. In my analysis of two larger datasets, I could not find a single case commoting about Chevron where the court said that it was deferring to a not best agency interpretation. Chevron offered too many ways to avoid that type of actual deferral (as opposed to a default rule in a state of statutory interpretive equipoise).

Added 8/15 @ 1:45 pm: One other thought on ambiguity. Loper Bright quotes the APA standard in § 706(2)(A), here, that agency action (here interpretation) cannot be held unlawful and set aside only if “not in accordance with law.” The literal terms of the APA require that a court apply the agency interpretation unless it can affirmatively find that it is “not in accordance with law.” That means statutory equipoise where the court is unable to determine the best interpretation must apply the agency interpretation. Thus, Chevron’s intuition that this is the right result is totally consistent with the APA. More importantly, the Supreme Court’s definitive interpretation of those precise words as a standard of review just 3 years before the APA was that those words commanded that the agency interpretation (there the Tax Court interpretation) commanded that the agency interpretation apply (actually, the Supreme Court did not use the term deference, which is a misnomer because applying the agency interpretation in equipoise is not deference); still the definitive interpretation when those words were inserted in the APA was that they required the agency interpretation in a state of statutory equipoise. Dobson v. Commissioner, 320 U.S. 489 (1943). I discuss this issue in more detail in my article, noting that APA 706(2)(A) was almost certainly drawn from the statutory text interpreted in Dobson.

4. Legislative v. Interpretive Regulation. The Court confuses (Slip Op. 26-27) the distinction between legislative and interpretive regulations:

          Our review begins with the bedrock principle that "an administrative agency's power to promulgate legislative regulations is limited to the authority delegated by Congress." Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988). "An administrative agency does not have authority to pass regulations that are inconsistent with the meaning of a statute." Art & Antique Dealers League of Am., Inc. v. Seggos, 121 F.4th 423, 435 (2d Cir. 2024). When a litigant challenges an agency's interpretation of a statute that it administers, "the question a court faces . . . is always, simply, whether the agency has stayed within the bounds of its statutory authority." New York v. U.S. Dep't of Homeland Sec., 969 F.3d 42, 74 (2d Cir. 2020).

I discuss the difference between legislative and interpretive regulations in my Federal Tax Procedure Book (2025 Student Ed. 44-47 and 2025 Practitioner Ed. 71-75). A high level overview of the difference is:  a legislative regulation is adopted under a statutory grant of authority to make the law (e.g., the consolidated return regulations authorized by § 1502) and an interpretive regulation is adopted to interpret the statute rather than make the law (e.g., the §7805(a) general authority or in some cases specific authority in IRC provisions). The Regulation in issue in New Jersey v. Bessent is an interpretive regulation that is tested for the validity of the interpretation (or as suggested in Loper Bright, the court determines the best interpretation and applies the best interpretation). The Court could have just eliminated the first sentence in the quoted paragraph.