Following the Loper Bright decision, which effectively reduced the power of federal agencies to interpret ambiguous laws, tax departments are faced with potentially reevaluating compliance, litigation preparedness, and risk management strategies, among other issues. Recently, TEI convened a cadre of experts at its Audits & Appeals Seminar to speak on this key topic, and Tax Executive caught up with the group to garner further insights. The panel includes Geoffrey Collins, partner in the tax controversies practice at Mayer Brown; David Foster, partner in the tax disputes practice at Kirkland & Ellis; Ben Mower, senior tax counsel at ExxonMobil; and Nikole Flax, principal in the tax controversy group at PwC. Sam Hoffmeister, Tax Executive senior managing editor, moderated the discussion.
Sam Hoffmeister: Following the Loper Bright decision, what are some of the immediate challenges corporate tax departments face when navigating potentially ambiguous IRS regulations?
Geoffrey Collins: I think the immediate challenge is looking back and seeing whether there are issues, whether there are regulations you might have challenged but didn’t, that now you’d want to challenge after Loper Bright. So, any kind of regulatory challenge we’re going to do, we’ve always got to think about statutes of limitations. I think the first challenge for tax departments is looking at your inventory of your years that are open. Do you have issues you should be raising now, post–Loper Bright, that the statutes of limitations are getting close on?
David Foster: I think also that it changes the way that we think about regulations. For a very long time, if you had an on-point regulation, for the most part you assumed it was valid and moved ahead following it. So, there’s a challenge in learning the language of Loper Bright, in evaluating the tax positions you’re currently taking, in thinking about how we do tax research. And then we’re much more focused now on the statute. It’s a more legitimate question—is the regulation consistent with the statute? And for people in-house, becoming conversant in these terms if they’re not already so that they can message those types of issues with the various audiences internally that they discuss them with.
Collins: I think that’s a really important point. How many of us really spent more time in the statute book than we did in the reg book? How many of us, faced with a [Section] 482 question, actually read 482 before thinking about what the regs say? I think it’s just a general mindset change that taxpayers have to have, that, no, the courts reminded us—we really do start with the statute.
Foster: And one more I would add—for the most part, procedurally, if after all of that you come to the view that you’ve got an invalid regulation, you’re going to face a very hostile audience for that argument with Exam and with Appeals. So, if you decide you want to go down that route, you need to be preparing to litigate on that issue from the various earliest stages of taking that position.
Ben Mower: You know, David, that brings up another point. This question uses the words “potentially ambiguous IRS regulations.” I think you’re 100% right that if the taxpayer raises a reg invalidity challenge, they’re not going to get that through IRS Exam or IRS Appeals. They probably will have to litigate it. So then, that raises the question to me: When are you saying that the regulation is invalid versus when are you saying this regulation is ambiguous, and I have a legitimate reading of it? Arguing about how a regulation applies is nothing new in IRS Exam, and IRS Appeals routinely compromises or settles issues where Exam and the taxpayer disagree about how the law should apply to the taxpayer’s specific facts. The government thinks a regulation applies one way; you think it applies another. And those things are resolvable in Appeals.
Foster: Especially if you have a side argument that one of the readings—the one you don’t like—would render the reg invalid.
Collins: David, that’s always been one of my favorite takes on this question. We got two different ways to read the regulation. One of them makes a regulation valid; one of them makes it invalid. That’s a way you can backdoor these kind of regulatory invalidity arguments at Exam or at Appeals. And I think Loper Bright helps a lot in that regard.
Hoffmeister: How might corporate tax departments need to adjust their risk management strategies around regulatory uncertainty?
Mower: If you’re not going to be challenging regulations, I’m not sure you really need to adjust your risk management strategies too much in light of Loper Bright. I can’t imagine that the IRS will be challenging its own regulations, so if you’re reasonably following those, you’re probably fine on your risk management strategies. On the other hand, if you’re looking at a transaction, or a past transaction with an open statute, and you’re going to take a position that that regulation is invalid, I would be thinking about financial reserves. Is this reg invalidation argument that I’m making something less than a “should” opinion such that I should reserve it financially? If I do that, I need to include the position on a Schedule Uncertain Tax Position, Schedule UTP, which should get you penalty protection on the issue or constitute adequate disclosure for penalty protection. If you’re arguing that a regulation’s invalid, is that position contrary to a regulation? Do you need to file the Form 8275-R to report that? That also provides some benefits in terms of penalty protection.
Foster: I would echo Geoff’s point earlier about statutes of limitations here as well. In particular, people often hear that there are other taxpayers out there that may be more aggressive in making reg challenges, especially with respect to prior years. Even if the nature or culture of your corporate tax department is not to be out in front on these, protecting your statute can be really important so you don’t have to someday later explain why that taxpayer won and got a refund and it’s too late for you to do so.
Nikole Flax: I agree with the comments. There may be, depending on the posture of the company, a taxpayer that is prepared to litigate because it is clear that the issue won’t be resolved within the IRS. For other companies that are not looking to be the face of an issue, they need to make sure they’ve taken the right steps to keep their statutes open, as we’ve just talked about. One additional point to mention is that even before Loper Bright, over the last several years there has been an increase in challenges to regulations. It isn’t as uncommon as it was many years ago. I think it is a prudent practice of a corporate tax department to take all the steps that they need to in order to ensure that they can take advantage of what may be the ultimate decision with respect to litigation of some of these issues. Considering a regulation challenge is not as rare as it was years ago. Now, it’s incumbent on companies to make sure that if there is a regulation challenge that could benefit the company, they take steps to ensure the ability to take advantage of the result.
Collins: I think ultimately that, echoing both those points, what you have to be doing from a risk management strategy is if you think that’s a legitimate position, you have to answer the question of preserve or fight. Do you preserve statutes of limitations now and let somebody else have the fight, or do you fight? I think now, post–Loper Bright, you can’t escape that question. You’ve got to at least ask that question and make a call.
Flax: And it’s been interesting recently, with Section 965 and the extended payment schedule which provides a number of companies a longer statute of limitations for refunds than they would have traditionally. That extended period from the source year won’t always be available. I think we’ll have to be mindful of the traditional statute of limitations. In looking at how long it takes a case to go through the courts, if you don’t take action or you don’t have a very lengthy audit, chances are your statute would be closed by the time a case is concluded.
Hoffmeister: How can tax departments ensure they stay compliant while protecting their interests?
Foster: This may seem really straightforward, but get educated on this issue, and think about it up front and historically as well. I realize many people may do that anyway, but a lot of tax professionals didn’t grow up in a world where there was any serious doubt about the validity of the overwhelming majority of regulations, and the pendulum’s moving a little bit. That’s the first thing I would say. Second, Loper Bright can be read narrowly to talk about reg validity and that’s very important, but it’s part of a larger shift in jurisprudence where the courts are much more aggressive in interpreting statutes and taking seriously the text of those statutes. So, Loper Bright can also be a shorthand for “the way that the law is being interpreted is different than it was fifteen years ago.”
Hoffmeister: How might this evolving regulatory environment, especially post–Loper Bright, affect corporate tax planning and long-term strategies? Are there specific areas where tax departments should be more cautious?
Collins: I would say on this one that I think it changes the questions you ask in your long-term strategy. We’ve already covered one of them: preserve or fight. So, you’ve identified an issue. Are you going to preserve your statute or are you going to fight? I think there are other questions. Do you join together with other taxpayers, or do you go it alone? If you’re going to fight a regulation, the odds are you’re not the only one with that issue. How seriously should you take finding other taxpayers, going through various taxpayer groups, and organizing rather than going it alone? I think another one is thinking about regulations that haven’t been issued yet. Are you going to convince, or are you going to fight? And that’s a question I think taxpayers have to ask themselves. If there’s a new issue, should you be more involved in the notice and comment process to try to steer the regulation that ends up being issued? Or should you lay in wait so that you can fight the regulation once it’s issued? Those are real questions that we haven’t necessarily asked before when just thinking about a long-term strategy that we’ve got to have in mind now.
Flax: I think that’s a really good point. We’ll know a lot more in three to five years about how things have played out. Right now, we haven’t had regulation packages go through the full notice and comment post–Loper Bright, where taxpayers would have been weighing in with their validity arguments. I think that in recent years the government has been doing a good job of responding to comments that are submitted on proposed guidance. They will be in a position that they will have to respond to those arguments. It will be interesting to see how it plays out when we have guidance now go through the notice and comment period post the decision because it will necessarily become part of the conversation. And to the extent the taxpayers weigh in on authority challenges, that will put the government in a position where they have to respond.
Foster: The other thing I would add is that we have a decision from the tax court in Varian Medical Systems that very literally interpreted two provisions in the Tax Cuts and Jobs Act. That poses both opportunities and risk. In response, we’ve seen the government be much more willing—and I expect this to continue—to assert common-law doctrines like economic substance and step transaction to challenge results that it doesn’t like. So, long term, I think corporate tax departments need to think seriously about those types of arguments that the government might advance as they develop their strategies going forward.
Hoffmeister: How do you think Loper Bright might influence Congress’ approach to drafting future tax legislation?
Flax: I think this has the opportunity to be really positive to the extent that you value more certainty and clarity with respect to the intentions of Congress. Policymakers generally want their policies to be effectuated, but due to the nature of the legislative process, at least in recent times, things generally go through in a pretty rushed process. There hasn’t been a lot of true legislative history for tax bills in the recent past. Generally, Treasury and the rulemaking process are used to fill in gaps. To the extent that policymakers do want their policies effectuated, I think best practice obviously would be to be more clear with respect to their intent, or being very explicit with respect to the authority given to the rule makers in terms of filling those gaps. As legislation is going through the process, there are different types of uncertainty. There are the gaps that are identified in the course of the legislative process, but there is not time or the ability to fill those gaps. So, you could see having pretty clear reg authority provided for Treasury and IRS to fill those gaps. There are then also the gaps that no one could foresee when legislation is going through. I think those will be more difficult to deal with, obviously, because they’re unknown at the time. But I would imagine that in a normal course of legislation, where there is time to effectuate an intended result, that the lawmakers would be more clear with respect to the granting of authority.
Hoffmeister: Any final thoughts you’d like to add?
Collins: One word of caution I would have is how much we think is going to happen from Loper Bright. In some ways we’ve seen this movie before. In 2011, the Mayo court declared the tax regulations were going to be subject to the same rules as every other kind of regulation. Commentators quickly pointed out that Treasury was doing a pretty bad job with the notice and comment procedures, and there were a lot of predictions about how every single Treasury regulation would be invalidated. We did see some really important taxpayer victories post–Mayo. But we saw a half dozen of them. What we didn’t see was a massive overthrow of the regulatory regime. The sky didn’t fall. I think it’s important to keep in mind that courts may be a little bit leery to start upsetting the wagon too much.
Mower: I’ve been thinking about the Loper Bright case in the context of your tax life cycle. I think there’s potential implications from Loper Bright in every phase of the tax life cycle. I think of legislative and regulatory advocacy, tax planning, financial reserves, compliance, Exam, Appeals, and litigation. We’ve talked about each one of those in some way in our conversation. If you’re going to learn Loper Bright and think about it well, that might be a lens through which a tax department could view the case. How does it affect each stage in the tax life cycle? And I’ll make one final point: What about the states? Do we think that there’s some state courts that might apply similar logic to overturn a state’s Chevron-like deference standard?
Foster: Much of the commentary on Loper Bright has focused on what courts are likely to find invalid, and that’s a fascinating question. But equally important questions are, as Nikole just talked about, how is Congress likely to respond? How are Treasury and the IRS likely to respond? What new arguments will they develop or emphasize that are different in a world where they’re defending against a bunch of reg challenges? So, remembering that there is a capital-C “Conversation” between Congress, Treasury, IRS, and taxpayers and courts is very important as to how all this is going to play out.
Flax: It’s obviously an exciting time right now, because there’s been a lot of news in the tax world around this decision and some of the related ones—and there are others that are in the pipeline and we’ll learn more. Knowing the long-term impacts will definitely take a lesson in patience. The government is not promulgating rules that they don’t think they have the authority to issue. I think, regardless of the standard, from their perspective they feel like they’re fulfilling their responsibilities and issuing rules that are necessary. It will take some time and a number of challenges before we have a clear sense of what the long-term posture is going to be in the environment and what kinds of challenges will be successful. It will be an exciting three to five years to see how it shakes out, potentially even longer. But yes, a lot in the mix.
