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. 

Interesting points from ABA Tax Online Presentation on Loper Bright (4/29/26)

I just attended online an ABA Tax Section Program titled: “Navigating Tax Guidance in a Post-Loper Bright World.” The ABA page on the program is here. The panel participants were very knowledgeable.

Early in the program, I asked the following question via the Q&A tool:

Under Loper Bright, if, after using all the tools of statutory interpretation, a judge still cannot determine whether the IRS interpretation or the opposing interpretation is the best interpretation (a state of equipoise on the interpretation), what does the judge do? Should the judge flip a coin, consult, his ouija board, follow his own preferred outcome, etc.?

I have asked a similar question in previous ABA programs, but the question was never answered. In today’s program, the question was answered—that is, at least an answer was proffered. I am not sure it is the right answer but it certainly echoed Loper Bright’s reasoning, such as it is.

So what was the answer? Basically, the answer given by the judge on the panel was that, with good statutory interpretation, the judge will always have something to tilt the judge to the best interpretation. (That is my paraphrasing and advanced apologies if I did not get it exactly right.) Actually, as the question was answered, I think the answer was hedged saying that he did not think it would happen very often (although that is from memory, I may be misremembering, and my notes don’t confirm that).

I think the essence of the answer was an echo of Loper Bright which is just flat-out wrong on the point of continuing possibility of ambiguity (equipoise). Loper Bright claimed by fiat that a judge should always be able to reach a single best interpretation with no need for a default rule such as Chevron deference to the agency interpretation. (For this, one must remember that a condition of Chevron deference was that the statute be ambiguous, meaning that the judge could not determine whether the agency interpretation or an opposing interpretation was the single best interpretation; if the court could determine the best interpretation, Chevron required the court to stop at Step One without any deference.)

Do General Authority Congressional Delegations of Authority to Prescribe Regulations to Carry Out the Provisions of the Statute Qualify for Loper Bright Deference? (11/12/24)

In Schaffner v. Monsanto Corp., 113 F.4th 364 (3rd Cir. 2024), CA3 here and GS here, the Court dealt with EPA pre-emption over state law labeling requirements. I won’t dive into the weeds on the substantive issue, but I focus on the Loper Bright issue of delegation of authority to the EPA to interpret—"fill up the details.” (See Slip Op. 27 n. 9, 113 F.4^th, at 381 n. 9):

Our analysis proceeds in three steps. First, in Part IV(A), we examine "EPA regulations that give content to FIFRA's misbranding standards."n9
   n9 The Supreme Court has recently overruled its decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), holding that "[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority." Loper Bright Enters. v. Raimondo, ___ U.S. ___, 144 S. Ct. 2244, 2273, 219 L.Ed.2d 832 (2024). Prior to Loper Bright, courts might have owed deference to the EPA's interpretation of the statutory term "misbranding," but no more. Nonetheless, while Loper Bright requires courts, not agencies, to determine the meaning of statutory terms such as "misbranding," we do not read the decision to undermine the EPA's authority to promulgate the regulations that implement FIFRA. As the Court explained in Loper Bright, while courts alone must ascertain a statute's meaning, "the statute's meaning may well be that the agency is authorized to exercise a degree of discretion." Id. at 2263. And one way for statutes to express that meaning is when they "empower an agency to prescribe rules to `fill up the details' of a statutory scheme." Id. (quoting Wayman v. Southard, 23 U.S. (10 Wheat.) 1, 43, 6 L.Ed. 253 (1825) ). FIFRA is such a statute: it expressly authorizes the EPA Administrator "to prescribe regulations to carry out the provisions" of the statute. 7 U.S.C. § 136w(a)(1). We therefore conclude that Loper Bright does not undermine the validity of the EPA regulations that govern pesticide labeling and that we consider in analyzing preemption under FIFRA in this opinion.

I focus on the enabling statute for Loper Bright agency authority to “fill up the details.” The statute quoted in part in the footnote excerpt above is 7 U.S.C. § 136w(a)(1), here, is in full:

(a)In general
(1)Regulations. The Administrator is authorized, in accordance with the procedure described in paragraph (2), to prescribe regulations to carry out the provisions of this subchapter. Such regulations shall take into account the difference in concept and usage between various classes of pesticides, including public health pesticides, and differences in environmental risk and the appropriate data for evaluating such risk between agricultural, nonagricultural, and public health pesticides.

 In (a)(2), the EPA-specific procedure for the regulations is in addition to the procedures in the APA for notice and comment regulations; (a)(2) is not relevant to the balance of the discussion. (For the balance of this discussion, all  references to regulations will be to notice and comment regulations.)

It strikes me that the authorization in (a)(1) is parallel to the authorization in § 7805(a), here, which I also quote and bold-face the relevant language:

(a)Authorization. Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Perhaps the key difference is that § 7805(a) authorizes “rules and regulations” and 7 U.S.C. § 136w(a)(1) authorizes only “regulations.” In both cases, at least in terms of historical deference, regulations are required. So, the question raised—and by no means yet definitively answered—is whether § 7805(a) authorizes Treasury to “fill up the details” in the sense intended by Loper Bright. (For present purposes, I will call such authority to "fill up the details" as conferring deference entitlement to regulations issued under such authority and will call those regulations Loper Bright deference.)

Can § 7805(a) & (b) Be Read as Delegating to Treasury/IRS Interpretive Authority with Deference (7/14/24)

I recently updated a post on Corner Post. See Does Corner Post Permit § 2401(a)’s 6-year Statute of Limitation to Apply from Date of Regulation for Procedural Challenges? (Federal Tax Procedure Blog 7/10/24; 7/11/24), here. In the update (in red), I argued that the Corner Post holding was meaningless because Loper Bright compels that the best interpretation controls whether or not incorporated in a regulation (previously required for deference) and whether or not such a regulation was procedurally or substantively valid. So, whenever a court adjudicates, the best interpretation should now be applied from the effective date of the enacted statute.

One consequence of that for tax is that § 7805(b), here, is rendered meaningless unless, as I note here, there is a continuing role for deference. A reminder on what § 7805(b) does. From my Federal Tax Procedure Book 71 (2023.2 Practitioner Edition) (footnotes omitted and emphasis supplied), here:

          (1) if issued within 18 months of the date of the statute, then to “the date of the enactment” of the statute;

          (2) if issued later than 18 months, then the earliest of the following dates: (a) the date the final regulation was published; (b) the date on which any Proposed or Temporary Regulation was published; and (c) the date on which any notice substantially describes the contents of the expected Proposed, Temporary or Final Regulation;

          (3) if necessary “to prevent abuse,” with no limitation as to the date of retroactivity;

          (4) “to correct a procedural defect in the issuance of any prior regulation,” with no indication as to the date of retroactivity;

          (5) if “relating to internal Treasury Department policies, practices, or procedures,” with no limitation as to the date of retroactivity.

These are limitations on the regulations but not the interpretation. If the [Treasury] interpretation is the best interpretation of the statutory text, then perforce the interpretation will apply from the effective date of the statute (whether or not the interpretation is in a regulation). In other words, if the IRS [Treasury] were to include the interpretation in a regulation which violated the time limitations, that would not invalidate the interpretation or prevent the interpretation from applying from the effective date of the statute; it would just invalidate the regulation.