Tax Court Applies the Best Interpretation as Required by Loper Bright Rejection of Chevron Deference (8/27/24)

In Varian Medical Systems, Inc. v. Commissioner, 163 T.C. ___, No. 4 (2024), JAT GD here [see note below at *] and GS here, a reviewed opinion with no dissents, the Tax Court fired its first round of application of the demise of Chevron deference in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024). For discussion of Loper Bright, see The Supreme Court Pronounces the Demise of Deference (6/29/24; 7/26/24), here (with linked revisions through 8/27/24 for discussion in Federal Tax Procedure Book (2024 Practitioner Ed.).
 
The issue in Varian Medical involved esoteric (to me) Code sections related to taxation of U.S. taxpayers doing business through foreign corporations. I don’t propose to get into the nitty gritty of that (probably could not do it with clarity anyway), but in summary the situation was:

A statute imposed U.S. tax on certain accumulated foreign earnings with an effective date. The statute purportedly had an unintended benefit arising from the interface with another Code provision. As I understand it, the unintended benefit was to allow the U.S. taxpayer both a credit and a deduction for foreign taxes deemed paid. Congress closed the purportedly unintended benefit (the deduction side) but with an effective date that did not go back to the effective date of the original statute. Could the IRS by interpretation (including an interpretation adopted in regulations) move the purportedly correcting amendment effective date back to the date of the original statute?

As stated, the result may have been a no-brainer even without the demise of Chevron. Facially, from the statute, the later “correcting” legislation only was effective from its stated effective date rather than the earlier effective date. Fair interpretation of the statute just couldn’t get that far even with Chevron. As thus stated, the issue could have been resolved at Chevron Step One. To be sure, it is probably fair to say that Congress did not intend both a credit and a deduction related to the same expense (in a broad sense), but Congress did clearly state its intent as to the two statutes' effective dates.
 
The Court addressed the deference and interpretation issues as follows (Slip Op. 28-32, cleaned up somewhat; sorry for the long quote but as this is a first application of Loper Bright, this is important):

          The rule adopted by the revised regulations essentially gives one of the TCJA’s amendments to section 78 [the purportedly correcting amendment] an earlier effective date than provided for in the TCJA [the original statute] to prevent taxpayers like Varian from deducting section 78 dividends. But, as we have already observed, the plain text of the statutes provides for the deduction.22 As the Supreme Court has said, “self-serving regulations never ‘justify departing from the statute’s clear text.’”
   n22 In the preamble to the final regulation, Treasury acknowledged that the rule was “necessary to ensure that th[e] principle [that a section 78 dividend is not eligible for a deduction under section 245A] is consistently applied with respect to a CFC that uses a fiscal year beginning in 2017 . . . in order to prevent the arbitrary disparate treatment of similarly situated taxpayers.” T.D. 9866, 2019-29 I.R.B. 261, 296, 84 Fed. Reg. 29,288, 29,319 (June 21, 2019). Treasury said that, without the rule in the revised regulation, “a U.S. shareholder of a fiscal year CFC would effectively be able to take both a credit and a deduction for foreign taxes by claiming a section 245A deduction with respect to its section 78 dividend.” Id. A fair reading of this preamble is that Treasury thought the plain statutory text provided (or could be read as providing) for the deduction Varian claims, as we find here.
 
          The Commissioner initially argued that, even if we disagreed with his interpretation of the statute, the statute was at least ambiguous and that, under Chevron, we had to accept his regulation’s attempt to fill the gap because his interpretation was permissible. But of course Chevron has now been overruled. See Loper Bright, 144 S. Ct. at 2273. A “permissible” interpretation of a statute no longer prevails simply because an agency offers it to resolve a perceived ambiguity. See id. at 2266, 2273.
 
          As the Supreme Court observed in Loper Bright, “statutes, no matter how impenetrable, do—in fact, must—have a single, best meaning. That is the whole point of having written statutes; ‘every statute’s meaning is fixed at the time of enactment.’” Id. at 2266 And, in cases involving ambiguity, “instead of declaring a particular party’s reading ‘permissible’ . . . , courts [must] use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity.” Id. Put another way, “in an agency case as in any other . . . even if some judges might (or might not) consider the statute ambiguous, there is a best reading all the same—the reading the court would have reached if no agency were involved.” Id. (cleaned up).
 
          In short, “[i]n the business of statutory interpretation, if it is not the best, it is not permissible.” Id. And, as we have shown above, the best (indeed the unambiguous) reading of the provisions at issue here permits Varian’s deduction.
 
          In reaching this conclusion, we have given “[c]areful attention to the judgment of the Executive Branch.” Id. at 2273. The Executive’s views “constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance.” Id. at 2262 (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). “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 [*30] factors which give it power to persuade, if lacking power to control.” Id. at 2259 (quoting Skidmore, 323 U.S. at 140).
 
          Nevertheless, “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” Id. at 2273. It “remains the responsibility of the court to decide whether the law means what the agency says.” Id. at 2261 Indeed, “Congress expects courts to do their ordinary job of interpreting statutes.” Id. at 2267. “And to the extent that Congress and the Executive Branch may disagree with how the courts have performed that job in a particular case, they are of course always free to act by revising the statute.” Id.23
   n23 See also Loper Bright, 144 S. Ct. at 2274 (Thomas, J., concurring) (“The judicial power, as originally understood, requires a court to exercise its independent judgment in interpreting and expounding upon the laws.” (cleaned up)); id. at 2275 (Thomas, J., concurring) (“The Founders envisioned that the courts would check the Executive by applying the correct interpretation of the law.” (cleaned up)); id. at 2284– 85 (Gorsuch, J., concurring) (explaining that the framers designed a judicial system “in which impartial judges, not those currently wielding power in the political branches, would ‘say what the law is’ in cases coming to court” (quoting Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177 (1803))).
 
          In the cases that come before us, “the question that matters [is]: Does the statute authorize the challenged agency action?” Id. at 2269. And, in answering that key question, we may not follow the Executive’s guidance (expressed in a regulation or elsewhere) when (as here) it contradicts the statutory text. The Supreme Court’s view on this principle is unanimous. See Loper Bright, 144 S. Ct. at 2264 (observing that, even under Chevron, “‘[i]f the intent of Congress is clear, that is the end of the matter,’ [Chevron, 467 U.S. at 842,] and courts were therefore to ‘reject administrative constructions which are contrary to clear congressional intent,’ [Chevron, 467 U.S. at 843, n.9]”); see also id. at 2297 (Kagan, J., dissenting) (summarizing Chevron and observing that the step one “inquiry is rigorous: A court must exhaust all the ‘traditional tools of statutory construction’ to divine statutory meaning. [Chevron, 467 U.S.] at 843, n.9. And when it can find that meaning—a ‘single right answer’—that is ‘the end of the matter’: The court cannot defer because it ‘must give effect to the unambiguously expressed intent of Congress.’
 
          That Congress delegated certain rulemaking authority to Treasury under section 245A 24 does the Commissioner no good here. This is so because his regulation purports to modify the effective date provision for new section 78, which could hardly have been clearer. In other words, it impermissibly attempts to change an unambiguous provision of the statute. As a result, the regulation falls outside the boundaries of any authority that Congress may have delegated under section 245A or 7805. See, e.g., United States v. Locke, 471 U.S. 84, 95 (1985) (“There is a basic difference between filling a gap left by Congress’ silence and rewriting rules that Congress has affirmatively and specifically enacted.” (quoting Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978))); see also Loper Bright, 144 S. Ct. at 2263 (noting that, where Congress has delegated discretionary authority to an agency, courts fulfill their role by “fix[ing] the boundaries of [the] delegated authority” (quoting Henry P. Monaghan, Marbury and the Administrative State, 83 Colum. L. Rev. 1, 27 (1983))).
   n24 Section 245A(g) provides: “Regulations.—The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations for the treatment of United States shareholders owning stock of a specified 10 percent owned foreign corporation through a partnership.”
 
          The Commissioner pushes back on this reading of the regulation. Specifically, he says that the regulation was not intended to interpret the statute’s effective date, but rather “the ambiguous interaction between [s]ection 245A and [p]rior [s]ection 78 during the relevant period.” Resp’t’s Br. 3. We are unconvinced for at least two reasons. First, if the revised regulation truly were aimed at resolving an ambiguity between section 245A and prior section 78, one would expect it to reference section 902, which was referenced in prior section 78 and was still in effect for Varian’s 2018 Year. See TCJA § 14301(d), 131 Stat. at 2225 (striking section 902 for “taxable years of foreign corporations beginning after December 31, 2017, and [for] taxable years of United States shareholders in which or with which such taxable years of foreign corporations end”). But neither the revised regulation nor its effective date provision mentions section 902. Rather, the sentence of the revised regulation purporting to disallow section 245A deductions for section 78 dividends applies only “to section 78 dividends that are received . . . by  [*32] reason of taxes deemed paid under section 960(a).” Treas. Reg. § 1.78-1(c). Therefore, the revised regulation ignores a key part of prior section 78 and presumably would not prevent Varian from claiming a section 245A deduction for its section 78 dividends related to section 902 deemed paid taxes. Thus, the omission of any reference to section 902 from the new regulation casts doubt on the Commissioner’s claim that the regulation interprets prior section 78.
 
          Second, and more importantly, we cannot ignore that the revised regulation makes precisely the same change as new section 78 (adding an explicit carveout for section 245A), but with an earlier effective date. No matter what the revised regulation intended to interpret, it cannot contradict the clear effective date provided for in the statutory text.25 See supra pp. 28–31.
   n25 In this context, contrary to the Commissioner’s arguments in his supplemental briefing, the revised regulation cannot be viewed as either “necessary” or “appropriate” to implement section 245A, regardless of how broadly one construes those terms as used in section 245A(g).
 
          For these reasons, the amended regulation does not alter our conclusion as to Varian’s claimed deduction.26
   n26 In view of these conclusions, we need not address the many other arguments the parties raise regarding the procedural and substantive validity of amended Treasury Regulation § 1.78-1.

JAT Comments:
 
1. I am not sure what to make of the reference (p. 30 n. 23) to Justice Thomas’ concurring opinion in Loper Bright. Justice Thomas would have resolved the case on constitutional imperatives reflected in the Marbury v. Madison soundbite rather than just the interpretation of the APA. Of course, the opinion for the Court in Loper Bright referred to Marbury v. Madison but perhaps as background rather than a basis of decision. I have noted (perhaps speculated) in Federal Tax Procedure (2024 Practitioner Edition) pp. 88-89 (as revised through 8/27/24) that the APA may have functioned as a stalking horse for the constitutional imperative announced in Marbury v. Madison. But, if so, the Loper Bright majority did not state that and maybe did not even imply it explicitly (OK, I know that is an oxymoron).
 
2. As I read Varian Medical, if Chevron had applied, Judge Toro would have decided for the taxpayer at Chevron Step One. In other words, as he states the case, there is no ambiguity as to the effective date of the amending statute.
 
3. Judge Toro recognized the grant of regulations authority in § 245A(g)  (in this case perhaps legislative rulemaking authority but certainly interpretive authority) could not include the authority to change an effective date that Congress clearly intended for the amending corrective legislation. The recognition in Loper Bright that Congress can grant interpretive authority that Courts must defer to is just not present in this case, so its application must await other cases.
 
 
* The link is to the opinion posted on my Google Drive. I did this because the Tax Court’s DAWSON system does not have permalinks for the documents it permits to be viewed online. In the DAWSON system, documents can be retrieved with a time-out link by going to the case docket entries (accessible by case name or docket number (Varian Medical No. 8435-23). Since that requires readers to take an extra step, I have decided to put the opinion initially on my Google Docs page (which does allow permalinks). One of the problems with this solution to lack of a permalink is that corrections to the opinion. Unlike the Supreme Court, the Tax Court does not provide easily accessible information on corrections to opinions.
 
When a permalink for the case is available in the Court’s Pamphlet reports (see here) I will provide that link, along with the permanent local 163 T.C. page number.  Presumably that permalink will have all corrections to the opinion. And, at some point, Google Scholar will have the final reported decision. I will provide that link when I am aware that Google Scholar has done that.