“There are only two tragedies in life, one is not getting what one wants, and the other is getting it.”
That quote is attributed to Oscar Wilde, and I’m not sure what the playwright knew about tax, but a recent court case made me think he might be on to something where tax code is concerned. In Loper Bright Enterprises ET AL, v. Raimondo, Secretary of Commerce, ET AL (No. 22-451), the United States Supreme Court overturned Chevron Deference—essentially giving federal judges, as opposed to expert agencies, the power to decide what a law means for themselves.
This calls into question a wide range of regulations issued by the Internal Revenue Service and other agencies. For those not familiar with the Loper Bright case, it was never about tax. It involved a regulation under the Magnuson-Stevens Act requiring fisheries to be subject to federal observers, with the observers being paid by the fisheries. The fisheries challenged this regulation and appealed to the U.S. Supreme Court. The decision calls into question the regulation writing ability of any government agency.
Like I said, this case isn’t directly about tax, but the implications can trickle down to impact tax and transfer pricing laws—and therefore taxpayers. Many regulations are issued to clarify what behavior is required to comply with the law. Conceptually, any statute having a hint of ambiguity clarified by regulation, may be challenged by persons affected by the regulation. The U.S. Supreme Court has opened the flood gates for taxpayers to challenge anything and everything that they disagree with in terms of tax code.
The Internal Revenue Code contains both implicit and explicit regulatory authority, e.g. §7805(a) as a general grant of regulatory authority, or §1061(f) that instructs “the Secretary shall issue such regulations . . .as necessary or appropriate to carry out the purposes of this section.” By holding that unless congress specifically authorizes the agency, the agency may not be authorized to issue interpretive regulations concerning any gray areas within the statute, with the corresponding burden falling to the courts to follow traditional rules of statutory construction for the interpretation of the statute.
Transfer Pricing Laws
Now, for the more interesting aspect of this regarding transfer pricing, Section 482 contains about 100 words. The regulations in effect encompass approximately 50,000 words. When one looks back on how these regulations have been utilized, the court decisions issued under them and how often companies end up in court without challenging the regulations, one can only wonder what the environment will be like in U.S. trial court rooms as inventive lawyers craft arguments to oppose various regulations.
Of course, since the U.S. Supreme Court is not a trial court, the immediate effect of this ruling will not impact their calendar up front, and possibly in only limited fashion as they have the luxury of picking and choosing which cases they will entertain. The inverse of this is that trial courts do not have this luxury and must entertain anyone with a gripe and a filling fee.
