On Remand from Supreme Court on Chevron's Demise, D.C. Circuit Holds that Agency Interpretation is Best Interpretation (1/11/25)

Yesterday, the D.C. Circuit decided Lissack v. Commissioner, ___ F.4^th ___ (D.C. Cir. 1/10/25), D.C. Cir. here and GS here [to come]. The Supreme Court had remanded Lissack to re-consider its previous opinion in Lissack v. Commissioner, 68 F.4th 1312 (D.C. Cir. 2023), here in light of the demise of deference in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), here.

I first describe the current Lissack decision in a straightforward manner. After that, I will discuss Lissack as an example of the type of case where, during the Chevron regime, courts , determined that the agency interpretation was the best interpretation and cited Chevron because best interpretations are necessarily reasonable; in effect, where that phenomenon occurs the courts have not deferred to the agency interpretation even though they may cite and discuss Chevron. But let’s first turn to the current Lissack decision.

Bottom-line, the Lissack panel determines that the agency interpretation is the best interpretation and therefore denies Lissack relief for that reason.

The context, highly summarized, is: Lissack filed a whistleblower claim regarding a condominium group’s treatment of membership deposits. The IRS decided to audit as a result of Lissack’s claim; otherwise, the IRS would not have audited at all. During the audit, the IRS made two key decisions: (i) that the taxpayer correctly reported the membership deposits, thus collecting no proceeds based on the whistleblower's claims; and (ii) that the taxpayer impermissibly claimed a deduction for an intercompany debt, thus collecting proceeds. The interpretive regulation required that, for a whistleblower award, the adjustment and related collected proceeds, the base for the award, must arise from the whistleblower’s claims. In other words, adjustments and collected proceeds unrelated to the whistleblower’s claims do not give rise to an award. The D.C. Circuit panel thus held that the IRS regulation treating separate adjustments as separate administrative actions was the best reading of the statute. (See Slip Op. 17-26.)

The whistleblower argued for a “but for” test that asked whether the IRS discovered the adjustments because of the whistleblower’s claims which was the case here because the IRS started the audit that it would not have otherwise started because of the whistleblower’s claims. The D.C. Circuit panel rejected that argument.

The D.C. Circuit panel also rejected other whistleblower arguments about discovery and trial de novo but I discuss here only the Chevron issue, the basis for the remand from the Supreme Court.

 Agency Interpretation is Best Reading of Statute

Now, back to the point I mentioned as to whether the earlier decisions in Lissack really deferred to the agency interpretation. I have previously addressed this issue in discussing the Judge Lauber’s Tax Court opinion in Lissack. The Impact of Chevron Deference is Exaggerated (Federal Tax Procedure Blog 8/19/21; 8/21/21), here. The blog is a long one, so I copy and paste here the relevant discussion:

Added 8/20/21 11:00 am:

I thought it might be useful to readers not deep in the weeds on deference to test my general speculation above that, when the hypothetical judge does the work to determine the best interpretation of the statute, it would not be common that the judge will then actually defer to a less persuasive agency interpretation.  Let’s focus on Judge Lauber’s opinion in the case that started this discussion,  Lissack v. United States, 157 T.C. ___, No. 7 (2021), here.

I direct readers attention to the statutory interpretation discussion (pp. 13-23).  Judge Lauber concludes the Chevron discussion (p. 21):

            In sum, we conclude that the regulatory provisions at issue, taken together, are not “arbitrary, capricious, or manifestly contrary to the statute.” Chevron, 467 U.S. at 844. Treasury reasonably determined that a multiple-issue IRS examination could comprise more than one “administrative action.” And it reasonably concluded that the IRS does not “proceed based on” the whistleblower’s information unless that information substantially contributes to the “administrative action” that generates proceeds. We accordingly reject petitioner’s challenge to the regulation’s validity.

Judge Lauber does not say that the regulations interpretation is not as good as his own interpretation and is nevertheless deferring to the regulations interpretation.  Indeed, he does not say that he has a different, better interpretation than the regulations interpretation.  I think if you parse what he says otherwise (pp. 18-21), Judge Lauber was satisfied with the agency interpretation and not just because it was a less-best reasonable agency interpretation. Judge Lauber expresses no concern about the agency interpretation.  In this case, he does chant Chevron Step Two.  But his actual discussion of the merits of the interpretation at least suggests that he thinks it is the best interpretation of the ambiguous statute.  If I am correct on that, this is a Category Three case in disguise where there is no deference to the agency interpretation.  Cf. Oakbrook Land Holdings, LLC v. Commissioner, T.C. Memo. 2020-54, * 25, here (where, in the regulations ambiguity Auer deference analog to statutory ambiguity, the Court said there is no need for deference where the “traditional tools of construction” on de novo review support the IRS interpretation without deference).

 I would appreciate hearing from readers with views on this issue.  Please respond either by comment or by email.  Thank you. 

Remember that there is real deference only when the IRS interpretation is not the best interpretation. We now know, via the current Lissack panel opinion, that the interpretation is the best interpretation for which deference is meaningless. 

Empirical Analysis of Actual Deference in the Chevron Era

I have done some empirical analysis of Courts of Appeals decisions in the Chevron era (pre-Loper Bright) and concluded that there was far less deference really going on than the commotion about Chevron would indicate. See Is Chevron on Life Support; Does It Matter? (4/2/22; 4/3/22), here.; and Chevron Step Two Reasonableness and Agency Best Interpretations in Courts of Appeals (2/9/23), here.

In some of my various writings on this subject, I have quoted Judge Jon Newman of the Second Circuit (Jon O. Newman, On Reasonableness: The Many Meanings of Law’s Most Ubiquitous Concept, 21 J. App. Prac. & Process 1, 83 (2021) (emphasis supplied by JAT)):

     It is difficult to know how the Supreme Court or other federal courts determine whether an agency’s interpretation of an ambiguous statute is “reasonable.” No weighing process appears to be involved. It would probably be too cynical to suggest that the courts are just accepting agency interpretations with which they agree and rejecting those they disfavor, but in some cases that almost seems to be what is happening. Clearly there is no one meaning of “reasonable” in the context of Chevron deference. Perhaps this is simply a context where there is a narrow range of acceptable agency interpretations, on either side of the disputed issue, that courts are willing to uphold, but they are ready to assert the power to reject others that, for stated, or more often unstated, reasons, they deem beyond an amorphous notion of “reasonable.”

I think Judge Newman’s quote is consistent with my conclusion that, during the Chevron regime, there was less real deference going on than imagined. And, as I present here, I think Lissack is exactly such an example. What this may mean going forward is that the demise of Chevron deference will have less outcome determinative effects than imagined.