A Primer on Judicial Review of Tax Regulations after Loper Bright (6/4/25; 6/6/25)

Loper Bright held that courts review interpretive regulations de novo rather than with possible deference under the prior Chevron regime. Here are my bullet points focusing primarily on notice and comment Treasury regulations (the type subject to possible deference under the Chevron regime):

• Loper Bright de novo review means that the court will determine and apply the best interpretation (whether or not the regulation interpretation is the best interpretation).
• The sole exception to de novo review is that courts will apply some type of deference (I call it Loper Bright deference) if the statute explicitly or fairly implies the agency is to have discretion in the interpretation.
• Under Skidmore, courts may use the agency interpretation to help reach the best interpretation, (Skidmore is often called deference, but it is not deference because the court must still determine and apply the best interpretation and only uses the persuasiveness of the agency interpretation to determine the best interpretation; Skidmore is better described as “respect” rather than deference; deference means the court applies the agency “not best” interpretation rather than its own best interpretation.)
• Interpretive regulations may also be reviewed for procedural regularity under the APA § 706(2)(A)'s “arbitrary and capricious” standard (also called “hard look” review), a deferential standard that is, theoretically, much more agency-forgiving standard than de novo review standard.

I think it may be helpful to elaborate on the last bullet point. A prominent instance in tax of such arbitrary and capricious review is Hewitt v. Commissioner, 21 F.4th 1336 (11th Cir. 2021), here, holding that Treasury failed in the notice and comment process to address material comments; the court did not hold (see p. 1339 n. 1) that if Treasury had not committed that procedural footfault, the interpretation would have been invalid under the Chevon regime (now replaced by the Loper Bright de novo regime for testing interpretations). For a recent statement of how this works, the Supreme Court said in Seven County Infrastructure Coalition v. Eagle County, Colorado, 605 U.S. ___,  ___ S.Ct. ___ [to come], 2025 WL 1520964 (2025), SC here and GS here (quote is from Supreme Court Slip Op. 8-9):

    As a general matter, when an agency interprets a statute, judicial review of the agency's interpretation is de novo. See Loper Bright Enterprises v. Raimondo, 603 U. S. 369, 391-392 (2024). But when an agency exercises discretion granted by a statute, judicial review is typically conducted under the Administrative Procedure Act's deferential arbitrary-and-capricious standard. Under that standard, a court asks not whether it agrees with the agency decision, but rather only whether the agency action was reasonable and reasonably explained. See Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U. S. 29, 43 (1983); FCC v. Prometheus Radio Project, 592 U. S. 414, 423 (2021). 

The quote seems to suggest that the two standards are “either/or” propositions. I don’t think that is correct. An interpretive regulation can be tested under both the Loper Bright de novo review standard and the arbitrary and capricious standard. Thus, for example, where the statute grants the agency discretion to interpret, the agency interpretation can be outside the discretion granted. In theory, that might violate both the Loper Bright standard for delegated discretion and the arbitrary and capricious standard. Thus, there could be situations where the agency interpretation could pass muster under Loper Bright because it is within the delegated discretion but fails the arbitrary and capricious standard because of a procedural footfault. That phenomenon seems to be the situation contemplated in the opening clause of the second sentence in the quote above. But what would be the effect of failing the arbitrary and capricious procedural standard? The court would then apply the best interpretation, which will be the interpretation the court applies regardless of the procedural footfault and regardless of whether it is the agency interpretation.

The foregoing is the “Primer.” I now offer a high-level summary of some additional subtle points that readers may find helpful in considering the impact of Loper Bright. (For more detail, I offer my discussion here from my current working draft of the 2025 Procedure Book (to be published in final in August 2025; I caution readers that, although in the current working draft, the discussion too long and involved for the type of book I offer on Tax Procedure; if I have time and energy, I will shorten for the discussion in the 2025 edition, but because the more extended version contains much potentially useful discussion, particularly in the footnotes, I may edit it and publish it to SSRN separately):

1. When Loper Bright was decided, there were hyperbolic claims that the de novo regime rejecting Chevron's deference would revolutionize judicial interpretation and weaken the administrative state. (Administrative state is often a pejorative description including real or imagined evils of the federal bureaucracy.) However, the claims of how much actual deferring under the Chevron regime is questionable because Chevron deference offered ample deference avoidance tools—e.g., Major Questions Doctrine; rigorous application of Step One to eliminate ambiguity; at Step Two deciding that an agency interpretation that court was convinced was not the best interpretation was unreasonable—which the courts actually used rather than deferring defer to agency interpretation that the court did not believe was the best interpretation (the only circumstance in which deference was outcome determinative). See Post Loper Bright Approval of Agency Best Interpretations (12/3/24), here (with links to blog entries reviewing empirical data and citing prominent Second Circuit Judge Jon O. Newman, On Reasonableness: The Many Meanings of Law’s Most Ubiquitous Concept, 21 J. App. Prac. & Process 1, 83 (2021), here.); and Dan M. Berkovitz, The Aftermath of Loper Bright: The Demise of Deference Will Make No Difference in Securities Law, 55 Seton Hall L. Rev. 1611, 1614 & 1637-1655 (2025), here (section titled “The Minimal Impact of Chevron on the SEC”).

 2. Is § 7805(a) a delegation of interpretive authority as discussed in Loper Bright that may then confer Loper Bright deference on § 7805(a) Treasury regulations? See More on Whether Treasury/IRS Interpretations under § 7805(a) Are Entitled to Loper Bright Deference? (5/29/25; 5/30/25), here.

3. Regardless of the answer to #2, if the Treasury, in fact, adopts an interpretation in an interpretive regulation that is the best interpretation, must a court apply that best interpretation regardless of the time limits in § 7805(b)? I think the answer to that is yes. However, if the agency interpretation is granted Loper Bright deference (because of delegated discretion of the agency but not the best interpretation), Treasury might consider making the effective date of the regulation consistent with § 7805(b) or, alternatively, a court may cringe at applying the Treasury best interpretation outside the limits permitted by § 7805(b). Under the Chevron regime, claims were made that interpretive notice and comment regulations were really legislative regulations subject to the APA prospective application from the date of final regulation or application from the date of the interim final regulation (under Treasury practice, called Temporary Regulation) for “Good Cause.” Would Loper Bright deference require similar commotion so that agency “not best” interpretations given Loper Bright deference might be considered at least like legislative regulations subject to those APA required limits because the public would not have known the best interpretation (or the claim of best interpretation)? If so, would § 7805(b)’s retroactive authority be considered an exception to the APA required limits?

Added 6/6/25 3:00 pm: I add more on the question I ask in the first sentence of #3 above is whether the retroactivity limitations apply to an IRS interpretation that is the best interpretation is subject to the retroactivity limitations set forth in § 7805(b). My conclusion is that the § 7805(b) limitations are irrelevant because the court must apply the best interpretation which is the best interpretation from the effective date of the statute; different considerations apply to the retroacitivity of interpretations granted Loper Bright deference). I have just read that the petitions in a case titled Yum! Brands v. Commissioner (T.C. Case No. 8287-25 petition filed 6/4/25), here. The petition in the case is available on the Tax Notes free access site here. In relevant part, the petition seeks redetermination of IRS taxes of $9,219 for 2013, $2,093,468,869 for 2014, and $25,193,481 for 2015 and § 6662 accuracy related penalty of § $418,294,630 for 2014. Among the alternative claims stated in the petition are that (i) the IRS NOD is based on regulations which are substantively and procedurally invalid under the APA. See ¶ 4.a.2. Alternative Arguments. Among that mélange is:

[¶] 4.a.2.E. In the alternative, the 2024 Final Regulations are invalid because they are impermissibly retroactive under either (i) section 7805(b)(1)(C) or (ii) the general prohibition on retroactive rulemaking as set forth in 5 U.S.C. §553(d), and, in promulgating them, Treasury and the IRS violated the APA.

That seques in the broader issue of whether the substantive “interpretations” in the cited regulations pass muster under Loper Bright. The Loper Bright validity of the interpretation is a separate standard than the APA “arbitrary and capricious” procedural standard. That raises two questions: (i) whether the Treasury/IRS has been granted interpretive discretion under Loper Bright, in which case they may qualify for Loper Bright deference (which I have argued requires something like the Chevron two-step to determine whether the interpretation is within the scope of the delegated interpretive authority); and (ii) whether the interpretive regulations are “arbitrary and capricious” under the APA  for some procedural footfault (e.g., ¶ 9.H. Treas. Reg. §1.367(b)-10 is Invalid, ¶ 5.a.9.I. Treas. Reg. §§1.367(a)-3(a)(2)(iv) and 1.367(b)-10(a)(2)(iii) are Invalid, ¶ 5.a.9.K. Treas. Reg. §1)367(b)-10(d) is Invalid, 5.a.9.L. The 2024 Final Regulations are Invalid).

4. Loper Bright deference, like Chevron, is meaningful only where it permits or requires a court to apply an agency interpretation that the court does not believe is the best interpretation. Again, if the agency interpretation is the best interpretation, deference is irrelevant. See, e.g., Lissack v. Commissioner, 68 F.4th 1312 (D.C. Cir. 2023), here (where the Supreme Court remanded to consider in light of Loper Bright because the prior D.C. Circuit opinion appeared to apply Chevron deference, but upon remand, the D.C. Circuit held that the Treasury interpretation was the best interpretation, thus not needing deference). Lissack illustrates the point I made above using anecdotal evidence (see #1) that there was less deference under the Chevron regime than previously imagined.

Finally, I offer some issues which I have discussed elsewhere:

5. Does pre-Chevron deference based on factors other than ambiguity as implied interpretive delegation survive Loper Bright. See Hamel v. Commissioner, T.C. Memo. 2025-19, discussed in Tax Court Sustains Regulation's Filling Gap in Statute on Factors Other than Ambiguity (Federal Tax Procedure Blog 2/26/25/ 3/4/25), here.

6. Are notice and comment interpretive regulations entitled to Loper Bright deference, or may subregulatory guidance in some cases also qualify?

7. Is the Major Questions Doctrine used to avoid delegated interpretive authority to the agency relevant to Loper Bright deference?

8. Can Brand X, which, under Chevron, allowed an agency to adopt a Chevron deference-entitled interpretation contrary to a prior court decision, apply to Loper Bright deference? See Sixth Circuit Opines on Types of Deference after Loper Bright (4/28/25), here (discussing United States v. Bricker, 135 F.4th 427 (6th Cir. 2/22/25)).

8. Is the Supreme Court opinion of the court really serious in its claim that statutes have no ambiguity that can avoid the best interpretation of the statute? Obviously, that can’t be true where there is delegated authority to interpret.