Key Takeaways:

  • Robert Kovacev, a lawyer at Miller & Chevalier, said businesses should review their tax positions to determine if they rely on federal regulations that could be challenged following the U.S. Supreme Court's Friday ruling in Loper Bright Enterprises v. Raimondo. The ruling overturned the so-called "Chevron deference" test, which had required courts to defer to government agencies' reasonable interpretations when laws are ambiguous.
  • The 6-3 ruling is a major turning point for businesses and their regulators. Its impact extends far beyond the environmental regulation at the heart of the case—which involved a National Marine Fisheries Service requirement that businesses pay for federal observers aboard vessels to curb overfishing—and reaches the U.S. Department of Labor, the IRS, and all other federal agencies.
  • "The tax implications could be enormous," Kovacev said in an interview. He noted that the Treasury Department and IRS have issued a vast number of regulations, sometimes thousands of pages long, such as those accompanying the 2017 Tax Cuts and Jobs Act, and that challenging these regulations previously required a two-step process. "Now those constraints are removed, making it easier for taxpayers to challenge them... Every judge must now review the regulation themselves and conduct an independent analysis, rather than simply deferring to the IRS's interpretation."

Deep Dive:

Eric Fader, a tax attorney and special counsel at Duane Morris, said much of the work analyzing the Supreme Court ruling's impact on tax and financial reporting will fall on CFOs.

"If I were in the CFO's position, knowing now that administrative interpretations are no longer presumed correct, my cost-benefit analysis of taking a position or continuing litigation would change," Fader said. He added that companies' strategies will be "viewed through a new lens because the decision-making framework has changed."

The ruling could affect tax positions taken in tax returns and financial reporting, he said. For example, under generally accepted accounting principles (GAAP) and ASC 740, companies must disclose whether they have taken "uncertain" tax positions. But if regulations are challenged, companies may want to adjust their strategies.

"If in the past I took an income tax position that might conflict with Treasury regulations, and the regulation was ambiguous but the Treasury's interpretation was reasonable, I might have thought I needed to recognize a liability," Fader said. "But given the court's ruling stripping away the presumption that agency interpretations are correct, my chances of prevailing might increase. This could constitute a change in expected outcome, causing me to reassess the financial reporting consequences."

Regarding which tax regulations businesses should focus on to consider challenging, Kovacev advised companies to look for rules that go beyond the scope of the statute. "Often, the code section will say you must do A, B, C to qualify for a tax benefit, but the IRS might say 'oh, you also need to do D, E, F,'" he said.

The full tax impact of the ruling may not be entirely favorable to businesses, Fader said. "Businesses may immediately view it as a major victory, but upon further evaluation, they may find unintended consequences," he said in the interview. He added that it could lead to courts being clogged with regulatory challenges and could also dampen actions by some agencies whose guidance businesses are awaiting.

The Supreme Court ruling offers new options for corporate tax positions at a time of heightened partisan tensions over tax policy and IRS funding. Previously, Congress approved $80 billion in additional IRS funding in 2022 through the Inflation Reduction Act, as CFO Dive reported.

The IRS did not immediately respond to a request for comment.