Tax Court Sustains IRS Interpretation for the Research Credit as Best Interpretation or, Possibly, with Loper Bright Deference from § 7805(a) (6/19/26)

In Smith v. Commissioner, T.C. Memo. 2026-50, TC No, 13382-17 here at #286 dated 6/16/26 and GS here, the Court sustained a regulations interpretation of the research credit over the taxpayers’ Loper Bright objections. Readers will recall that Loper Bright rejected Chevron deference for agency interpretations, exhorting courts to determine and apply the “best” interpretation. “Best interpretation” was not an inflexible command; Loper Bright permitted deference to agency interpretations when delegation was expressly or impliedly granted by Congress and courts might still find the agency interpretation persuasive under Skidmore.

A number of pre-Loper Bright cases sustained the applicable agency regulation by applying Chevron deference. In Smith, the taxpayers argued that (*30) “under the Supreme Court's landmark decision in Loper Bright, Treasury Regulation § 1.41-4A(d) is no longer the single best reading of section 41(d)(4)(H).”

One problem with the taxpayers’ argument was that prior cases had sustained the interpretation under Chevron. The Smith opinion mentions (*31) “statutory stare decisis” which Loper Bright expressly approved for pre-Loper Bright cases applying (or appearing to apply) Chevron deference. Smith concludes that discussion (*33):

           Thus, we find that the holdings in our prior cases and the aforementioned decisions of the Federal Circuit and Federal Claims continue to remain in effect. See Diversified Grp. Inc. v. Commissioner, Nos. 17038-18L, et al., 166 T.C., slip op. at 21–22 (2026); see also, e.g., Garcia Pinach v. Bondi, 147 F.4th 117, 121, 131–33 (2d Cir. 2025) (analyzing Loper Bright and the doctrine of statutory stare decisis and leaving undisturbed the holding of a prior panel opinion).

More importantly, Smith reasons (*33-*34, emphasis supplied by JAT):

          Moreover, we find respondent’s power to persuade argument compelling. In reaching a conclusion on the validity of a regulation we may give “[c]areful attention to the judgment of the Executive Branch.” Loper Bright, 144 S. Ct. at 2273. For the views of Treasury in this context “constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance.” Id. at 2262 [*34] (quoting Skidmore, 323 U.S. at 140). “The weight of such a judgment in a particular case,” of course, “depend[s] upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” Id. at 2259 (quoting Skidmore, 323 U.S. at 140); see also Varian Med. Sys., 163 T.C. at 106. Congress has delegated authority to Treasury under section 7805(a) to define criteria for Congress’s funded research exclusion found in section 41(d)(4)(H). Here, Treasury has exercised that authority and issued longstanding and favorable administrative guidance that offers both clarity and certainty for taxpayers.

Considering the foregoing, we conclude the regulatory requirements found in Treasury Regulation § 1.41-4A(d) used to determine whether research is funded are reasonably related to and otherwise consistent with the intent of section 41(d)(4)(H). Accordingly, we reject petitioners’ contention that the Supreme Court’s decision in Loper Bright undermines the prior decisions that relied on Treasury Regulation § 1.41-4A(d) and their effects as precedent in these cases. Further, we reject petitioners’ reading of the phrase “to the extent funded by any grant, contract, or otherwise” found in section 41(d)(4)(H) to mean only “a sum of money set apart for a specific objective” and likewise determine our reading of this phrase would not be as beneficial as the Treasury regulation requirements. In other words, we find no benefit to petitioners’ argument, should we be inclined to reject respondent’s reading of the Code for our own.

          On the basis of the foregoing, we decline to invalidate Treasury Regulation § 1.41-4A(d) and the requirements for determining funded research under section 41(d)(4)(H) incorporating both “contingent on success” and “substantial rights” elements.

As I read this, Smith is saying that, although the prior cases may have noised about Chevron deference and in some cases even appeared to apply Chevron deference, in truth and might pass muster under statutory stare decisis, the IRS interpretation was the “best” interpretation, passing muster under Loper Bright’s de novo interpretation imperative.

Smith muddles on the point of best interpretation by citing § 7805(a) as a Congressional delegation of interpretive authority for the substantive Code provision. Is Smith suggesting in citing § 7805(a) that the interpretive regulation was a delegation qualifying for Loper Bright deference? If so, since Smith seems to have determined the agency interpretation was the best, was the citation of § 7805(a) necessary or even appropriate?

One side note on § 7805(a): Throughout its history, § 7805(a) has been authority for interpretive regulations. That authority was muddled by those claiming that interpretive regulations when applied by courts using Chevron deference meant that the interpretive regulation was transformed into a legislative regulation. That claim was always nonsense (even when made by Justice Scalia); with the demise of Chevron deference, courts are free to get past the nonsense. 

Tax Court Applies Statutory Stare Decisis for Chevron Cases (7/3/25)

In Moxon Corporation v. Commissioner, 165 T.C. ___, No. 2 (2025), TC here dkt # 59 and GS here, the Court held that (from the headnote):

          Held: The I.R.C. § 6662(h) penalties at issue are not subject to deficiency procedures pursuant to I.R.C. § 6230(a)(2)(A)(i).

          Held, further, the fact that the relevant deficiencies were improperly assessed does not affect R’s assessments regarding, and ability to collect, the I.R.C. § 6662(h) penalties.

 (I use the headnote because I think it fairly summarizes the opinion and introduces the subject I want to discuss—statutory stare decisis.)

In respect to the second holding above, the Tax Court invoked statutory stare decisis to apply a prior precedent relying on Chevron deference, saying rather cryptically (see Slip Op. 12-13):

          In addition the Supreme Court cautioned that by overruling Chevron it did not “call into question prior cases that relied on the Chevron framework. The holdings of those cases . . . are still subject to statutory stare decisis despite [the Supreme Court’s] change in interpretive methodology.” Loper Bright, 144 S. Ct. at 2273. Regardless  of the extent to which the holding in Thompson [Thompson v. Commissioner, 137 T.C. 220, 239  (2011)] relies on the standard of review set forth in Chevron, that holding is entitled to stare decisis.

          We again hold that penalties determined in a partnership-level proceeding are not subject to deficiency procedures pursuant to section 6230(a)(2)(A)(i). Rather, such penalties are assessable by the Commissioner. Taxpayers may raise any partner-level defenses to the penalties in a refund action or in a CDP case. § 6230(c)(1)(C), (4); McNeill, 148 T.C. at 489.

           Moxon arrived after I had already made substantial changes to the statutory stare decisis discussion in working draft for the 2025 Federal Tax Procedure (Practitioner and Student Editions). I have further revised that discussion to include Moxon. For readers who may have an interest in the issue, I include below a copy and paste of the text of the revisions without footnotes as of today and link here the revisions (red-lined) with footnotes (note that the footnotes, page numbers and cross-references will change in the final, although as I note below the final will be significantly shortened).