FEDERAL TAX WARNING

A must-read alarm bells warning by a senior tax analyst. Worth reading in full.

I. Introduction

I believe that the state of the federal income tax system¹ is poor, and that the situation is the worst it’s been for at least the 50 years I’ve been practicing tax law. I’m not alone in expressing this pessimism,² although not necessarily for all the same reasons.

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In recent years it has been impossible, both as a practical and legal matter, for Congress to fix unintended errors or ambiguities in tax legislation, including preventing unintended tax benefits. Until lately, Treasury and the courts could provide relief to a limited extent. However, Loper Bright³ has among other things: (1) made it more difficult for Treasury or the courts to correct unintended errors in tax legislation; (2) made it more likely that different courts will interpret the IRC in different ways, resulting in different tax laws being in effect in different parts of the country; (3) exacerbated an aspect of the tax system that is seriously unbalanced in favor of taxpayers and against the fisc, namely the lack of anyone having standing to challenge pro-taxpayer regulations; and (4) created serious questions about the validity of many existing tax rules, including those that have long been considered routine and relied on by both taxpayers and Treasury.

Finally, all of this is happening while the ability of the IRS to police aggressive tax planning is seriously curtailed.

I believe these circumstances, taken together, create a serious threat to the integrity of the income tax system. This is particularly unfortunate in an era of exploding budget deficits.

This report discusses the causes and possible consequences of this situation, first in the context of Congress, then the courts, and finally the executive branch.

II. Congress

A. Enacting Tax Legislation Is Difficult

In recent years, the enactment of tax legislation has become extremely difficult because of the close split in numbers of the Republican and Democratic parties in Congress, the major ideological differences between the parties, and the Senate filibuster. The Senate filibuster rule generally requires 60 votes to pass a bill, except for budget reconciliation acts that can pass with a majority vote. As a result, the only major tax legislation in recent years has been:

· the American Taxpayer Relief Act of 2012, which was a bipartisan compromise to deal with expiring tax provisions in the President George W. Bush tax cuts from 2001 and 2003, which had been passed under reconciliation;

· the Tax Cuts and Jobs Act of 2017, which was enacted when Republicans controlled the presidency and both chambers of Congress, and which passed under reconciliation with no Democratic votes in either the House or Senate; and

· the American Rescue Plan Act of 2021 and the Inflation Reduction Act of 2022, both of which passed under reconciliation with Democrats in control of the presidency and both chambers of Congress, and with no Republican votes in either chamber.

Likewise, the current Republican-controlled Congress plans to pass a reconciliation bill this year to deal with, among other things, provisions of the TCJA that expire at the end of the year. The bill, H.R. 1, the One Big Beautiful Bill Act, passed the House on May 22 on a 215-214 vote with no Democrats voting in favor.

This reliance on reconciliation is not good for the tax system for several reasons.

First, a reconciliation bill can be projected to lose no more revenue than a specified amount during the budget window, usually 10 years after enactment, and no revenue in any year thereafter. Yet for tax provisions that are newly adopted, legislators usually want as many tax cuts as possible within the stated revenue limitation. The inevitable result is the phase-in and phaseout of various provisions that gain or lose revenue, with no provision lasting more than 10 years. This is why many of the TCJA’s provisions will expire at the end of 2025.

This lack of permanence results in considerable uncertainty and instability in the tax system. It also reduces the stimulus effect of provisions intended as tax incentives, particularly toward the end of the statutory period, because taxpayers cannot count on an extension. The periodic need for extensions also results in a windfall for tax lobbyists and the campaign funds of members of Congress on the taxwriting committees.⁴

The historical use of reconciliation to extend expiring tax provisions also has negative effects on the tax system. The revenue loss of a reconciliation bill in the past has been determined on a current-law baseline, meaning that expiring provisions are assumed to in fact expire; the 10-year cost of extending them is taken into account; and the extensions cannot be for more than 10 years. This means that all the negative consequences of the initial adoption of the provisions, with phase-ins, phaseouts, and the 10-year limitation, continue each time an extension is required. This would arise, for example, upon Congress’s extension of the TCJA (and addition of any new provisions) using a current-law baseline.

By contrast, the use of a current-policy baseline in a reconciliation bill means that the base for determining revenue loss is the tax law in effect when that bill is adopted. As a result, an expiring provision can be extended permanently at no stated tax cost, either in the first 10 years or thereafter. Both the House and Senate have now passed a reconciliation resolution, to be implemented by H.R. 1, that will allow the use of a current-policy baseline to extend the TCJA permanently with no stated tax cost.

The theory of this approach is that an extension of an existing tax benefit would not be viewed by taxpayers as a tax cut, but rather the failure to extend an existing tax provision would be viewed by taxpayers as a tax increase. This approach also avoids the need for continuing the phase-ins and phaseouts and the lack of permanence arising from the continued use of a current-law baseline.

However, a current-policy baseline obscures the true cost of tax cuts and allows permanent tax cuts through reconciliation, both contrary to the purposes of reconciliation. To illustrate, a new tax cut could be enacted under either a current-law or current-policy baseline, lasting for only a year or two, with a resulting small stated revenue loss. At the expiration of the period, the tax cut could be extended permanently under current-policy reconciliation, with no nominal tax cost because it is merely an extension of existing policy.

Likewise, if Congress permanently extends the TCJA under a current-policy baseline, neither the initial 10-year cost of the extension nor the cost of the permanent extension starting thereafter will have been included as stated costs of either the TCJA or the 2025 reconciliation bill. In particular, the true reduction in revenue arising from the second reconciliation bill does not show up in the revenue estimate for either the first or second bill. The combination of the two bills allows a result that no one bill could achieve — namely, a permanent tax cut without the limitation on the allowed size of tax cuts intended to be provided by the reconciliation process.

The Joint Committee on Taxation estimates that the true cost of extending the TCJA for 10 years (including fully extending some benefits that are phasing out) would be $4.6 trillion disregarding additional interest expense, and $5.5 trillion including interest.⁵

For this reason, the current-policy baseline has been strongly criticized.⁶

Moreover, under a current-policy baseline, a new tax cut would logically be treated as a 10-year expense, even if it phased out in a shorter period. After all, a later extension would be viewed as having no tax cost under the same baseline, so the full cost would logically be taken into account on the initial adoption of the provision. Yet Congress, or at least the Senate, apparently intends to use a current-policy baseline to extend the TCJA at no nominal cost, but a current-law baseline to reduce the stated cost of new provisions that will phase out in less than 10 years. This combination is internally inconsistent and has been even more strongly criticized.⁷

Second, regardless of whether a current-law or current-policy baseline is used, the special procedures for the enactment of reconciliation bills often result in little or no legislative history. This can make it difficult to discern congressional intent, which may not matter as much now, since courts are giving less weight to legislative history. But in a close case, if a statute is truly ambiguous, a court might give legislative history some weight in interpreting the statute or in determining the validity of a Treasury regulation.

Third, reconciliation requires that each provision in the bill must be intended to increase or decrease revenue. This appears to prevent a reconciliation bill from including technical corrections to previous legislation, because the JCT does not consider them to have a revenue effect.⁸ Rather, a technical correction merely assures that the revenue estimate for the original legislation was correct. On the other hand, under either a current-law or current-policy baseline for reconciliation, it could be argued that the baseline for the technical correction should be the uncorrected version of the original bill. In any event, H.R. 1 as passed by the House does not contain any technical corrections, even to the Republican-passed TCJA.

More generally, it is not clear that even a simple extension of an expiring TCJA provision under a current-policy baseline would satisfy this requirement because by definition, the extension has no revenue effect. It has been suggested that every extended provision would need to be tweaked to create a revenue effect.⁹ In fact, H.R. 1 makes several very minor changes to the international tax rates (such as a change from 10 percent to 10.1 percent) that may have been made for this reason.¹⁰ If these changes are necessary for reconciliation, the resulting artificial tweaking will create complexity and is not good for the tax system.

Fourth, the revenue estimate under reconciliation takes account of the revenue cost of an increase in the IRS’s budget, or the reduced costs from a decrease in the IRS’s budget, but not any changes in tax collections that might result.¹¹ As a result, a decrease in the IRS’s budget is shown as a cost savings that can allow an additional tax cut in the same amount, with no net charge against the net allowed revenue loss in reconciliation. Yet the true effect of the decrease in IRS funding could well be a net revenue loss after taking into account decreased collections. So one provision that loses net revenue allows another provision that loses revenue, with no charge against the reconciliation target.

Likewise, an increase in the IRS’s budget counts as a cost, discouraging its inclusion in a reconciliation bill. Yet the actual net effect might well be a revenue increase, taking into account increased tax collections. These consequences of reconciliation are not good for the tax system.

Finally, Treasury regulations are not subject to the revenue constraints that apply to reconciliation. This creates an incentive for pro-taxpayer positions with significant revenue loss to be adopted by regulations rather than legislation. Moreover, because taxpayers have no standing to challenge the validity of pro-taxpayer regulations, a pro-taxpayer regulation that might violate Loper Bright could be used to avoid the constraints of reconciliation. For example, a new regulation could reduce the tax otherwise payable under a particular code provision in lieu of the provision being repealed or modified under reconciliation. I am not aware of this happening in the past, but the incentive to do so is not good for the tax system.

B. Enacting Good Tax Legislation Is Even More Difficult

1. Failure to adopt technical corrections.

The most obvious case of good tax legislation is technical corrections.¹² Major tax bills are complicated and often passed in a rush, without the opportunity for review by outsiders. They inevitably have scrivener errors, create unintended ambiguities, and allow for unintended results, both pro- and anti-taxpayer, because of fact patterns and interrelationships among provisions that the drafters simply did not think of.

In the good old days, technical corrections were routine, although sometimes delayed. For example, the Tax Reform Act of 1986 contained extensive technical corrections to the Tax Reform Act of 1984,¹³ the Technical and Miscellaneous Revenue Act of 1988 made technical corrections to the TRA 1986 and other legislation, and the Tax Technical Corrections Act of 2007 contained corrections of tax legislation going back to 1998.¹⁴

The need for technical corrections in more recent legislation is confirmed by so-called blue books published by the staff of the JCT. The blue book summary of the TCJA says in more than 70 places that a technical correction may be necessary to carry out the intent of Congress.¹⁵ Then-Ways and Means Chair Kevin Brady proposed a technical corrections bill for the TCJA in 2019 consisting of 90 pages of legislative text.¹⁶ Similarly, a blue book refers to the need for 25 technical corrections for legislation passed by the 117th Congress in 2021-2022.¹⁷ No action has been taken on any of these.

Technical corrections are particularly important today because of the increased focus on a literal reading of statutes. In the past, Treasury fixed many technical errors in the code by regulation, without much controversy. Treasury has tried to fix some of the errors in the TCJA identified in the blue book by regulation. However, regulations that are anti-taxpayer and contrary to the literal language of the code are not faring well in court when challenged by taxpayers, especially after Loper Bright. As a result, there are many gaps in the code not fixable by Treasury or the courts. Unless they are fixed by Congress, some of them will continue to have, as they have in the past, enormous and unexpected revenue costs to the government.¹⁸

Yet technical corrections are virtually impossible to enact today. As noted earlier, it is unclear if they can be included in a budget reconciliation bill. Moreover, because recent legislation has been enacted entirely by one party, the other party has no incentive to fix the former party’s errors. The result is that statutory mistakes may stay in place for a long time, if not forever. And the longer they stay in place, the more they become part of the normal tax landscape, and the greater the taxpayer opposition to fixing the pro-taxpayer mistakes.

2. Failure to eliminate unintended tax benefits.

Even aside from technical errors in the code, over time taxpayers often find techniques to take advantage of tax provisions in a manner that was not intended by Congress, which can result in enormous revenue costs to the government. Again, in the absence of corrective legislation, this problem is exacerbated by the increased emphasis on literalism under Loper Bright.

Many of these techniques have been known for decades, and many have been referred to in so-called Treasury green books and congressional studies. Still, as time passes, it becomes politically difficult to repeal them. Because there is no real constituency for tax reform, Congress rarely takes action against these transactions. The only exception is when revenue is needed for a budget reconciliation bill.

The techniques I would put in this category include: (1) partnership transactions such as basis shifting, disguised sales, and use of the ceiling rule; (2) estate tax avoidance techniques such as valuation discounts, short-term grantor-retained annuity trusts, avoidance of generation-skipping transfer tax, and taking advantage of the different definitions of grantor trusts for income tax and gift and estate tax purposes; (3) avoidance of the Self-Employed Contributions Act tax by active limited partners relying on the limited partner exception in section 1402(a)(13) and by shareholders in S corporations being paid inadequate compensation; (4) private placement life insurance used to hold investment assets specified by the insured; (5) donor-advised funds, especially when used to avoid private foundation limits; (6) partnership swap funds that avoid being investment companies by holding sufficient non-listed assets; (7) the narrowness of the wash sale rules and techniques to avoid those rules; (8) ownership of Roth IRAs of enormous size based on undervaluation of contributed assets; (9) section 302 basis shifting; (10) use of so-called Granite Trust transactions to generate tax losses; and (11) the use of section 852(b)(6) by regulated investment companies to avoid taxable gain to holders of ETFs.

Opinions on any of these particular matters may differ, in some cases strongly, but many, if not most, tax lawyers will agree that many transactions should be in this category. The point here is not to debate the policy justification for any particular transaction, but rather to emphasize the large number of unintended statutory results that Congress has not addressed for long periods. This is not good for the tax system.

3. Failure to review the originally intended tax benefits.

Many provisions of the code that were indeed intended by Congress have been widely criticized as unjustified on policy grounds by academics, congressional investigative reports, think tanks, and published articles.¹⁹ These are in a different category than the foregoing, because they fairly reflect the intent of Congress when enacted. Again, the purpose of this report is not to debate the merits of any particular provision, and views can strongly differ on good tax policy.

However, these provisions involve large amounts of tax, and once they are in place, they obtain strong political support. As a result, the permanent provisions are rarely reconsidered, and provisions expiring because of reconciliation are usually extended. I believe a good tax system would require a serious periodic review of the policy arguments for and against these provisions.

C. Failure to Fund the IRS

The IRA added $80 billion of long-term funding to the IRS and permitted the agency to begin hiring additional experienced professionals to audit complex tax returns. However, subsequent legislation has clawed back a significant portion of these funds, and the rest will likely be clawed back soon. This has had very negative effects on the IRS’s ability to collect taxes.

D. The Congressional Review Act

The Congressional Review Act²⁰ allows Congress, with the approval of the president, to disapprove a federal agency regulation within a specified time after its adoption. No filibuster is allowed in the Senate. After a regulation is disapproved, it has no force or effect. The agency is then prohibited from writing the same rule or a different rule that is substantially similar, unless specifically authorized by subsequently adopted legislation.

The act is mostly used to overturn regulations issued near the end of one administration when the new president is of the other party and both chambers of the new Congress have majorities in that other party. This avoids the need for the new administration to reverse the regulations, if it desires to do so, with the time-consuming notice and comment procedure of the Administrative Procedure Act. As a practical matter, it gives taxpayers adversely affected by a regulation another venue to overturn it.

This act was recently used, with significant Democratic support, to overturn final regs adopted at the end of the Biden administration that would have required reporting of gross proceeds of cryptocurrency transactions by decentralized exchanges.²¹ The overturning of the regulation was determined by the JCT to have a 10-year revenue cost of $3.9 billion.²²

The immediate result of Congress’s use of the act is that no regulation is then in effect. To put a new regulation in place, Treasury must go through the same notice and comment procedure that would have been required in the absence of the act. Treasury is then subject to the additional limitation that any new regulation must not be substantially similar to the old regulation, an issue that would not have arisen if Treasury had revised the old regulation by itself.

The act provides for a legitimate exercise of congressional power. However, it results in no regulation being in effect for a period of time, puts a burden on Treasury to promptly issue new regulations regardless of its other priorities, and limits what can go in a new regulation. It is not clear whether the result is an overall benefit to the tax system.

Further, H.R. 1, the budget reconciliation bill reported to the House of Representatives on May 20, contained a considerable expansion of the Congressional Review Act.²³ These provisions were removed from the bill immediately before passage by the House, apparently because of concerns about compliance with the Senate rules on reconciliation. However, the provisions are still relevant because supporters in the Senate hope to convince the Senate parliamentarian to allow the restoration of similar provisions there.²⁴

Under the proposed new section 810 of the act, a major regulation that increases revenue would not take effect unless it was affirmatively enacted into law within a specified period. This reverses the existing rule allowing such a regulation to go into effect absent a congressional veto. However, approval of a regulation in this manner would only determine that it properly went into effect, and objections to the regulation such as under the APA or Loper Bright would not be affected.

It is unclear how this proposal would apply to tax regulations. For example, it is unclear whether a revenue estimate would be required for every regulation in scope to determine whether it would increase revenue, or whether the baseline for revenue would be the revenue if the statute were in place with no regulation at all.

In any event, the proposal, if eventually enacted, could significantly and adversely affect the tax system. As a practical matter, except perhaps if both chambers of Congress were controlled by the same party as the president, every new tax regulation within the scope of the bill would have to be negotiated with the congressional tax staffs of both parties before promulgation.

This would, at a minimum, greatly slow down the rulemaking process. It could also politicize the process, weaken the ability of Treasury and IRS officials to write regulations and preambles that they truly believe in, and prevent major regulations from being issued at all. Courts might also give less Loper Bright deference to regulations and the supporting rationales in the preambles if they (correctly or not) view regulations as subject to political influence rather than being solely the best judgment of Treasury and the IRS.

In addition, the provisions removed from H.R. 1 would have added section 812 to the act. Under that section, all regulations and other agency guidance already in effect on the date of the reconciliation bill’s enactment must be submitted to Congress for review, beginning six months after enactment and within four years thereafter. Failure of Congress to approve the rules submitted by an agency within 90 days means the rules will have no effect and cannot be enforced by the agency. In any event, any existing rule not approved within five years of enactment automatically ceases to have effect at that time.

These requirements appear to apply to the entire Code of Federal Regulations and all subregulatory guidance. It is unclear whether Congress can pick and choose among the rules submitted for a year by an agency, or whether failure to approve all of them in a single resolution means that none of them can ever become effective.

If these rules are eventually enacted, all existing Treasury and IRS guidance would potentially be at risk of not obtaining future congressional approval. While the consequences are unclear, this might result in the retroactive invalidation of existing guidance that taxpayers, Treasury, and the IRS have relied on. This could also make it impossible for taxpayers to rely on any existing regulations or other guidance in the future until approval is obtained. None of these results would be good for the tax system.

III. The Courts

Legislation inevitably creates errors in the code that need fixing, and as a practical matter, Congress is unable to fix those errors. The resulting negative effect on the tax system is greatly exacerbated by the increasing literalism of the courts. This prevents both the courts and Treasury from fixing errors by considering the intent of Congress if different from the specific statutory language.

A. Before Loper Bright

Before Loper Bright, the courts granted agencies what was called Chevron²⁵ deference, such that that (1) if a statute is clear, that is the end of the inquiry (generally referred to as Chevron step 1), but (2) if the statute is “silent or ambiguous” on the precise question, then the court must defer to the agency’s interpretation “if it is based on a permissible construction of the statute” (Chevron step 2).

Courts have increasingly followed the literal language of statutes under Chevron step 1, without regard to legislative history or likely congressional intent. For example, in the tax context:

· In Gitlitz,²⁶ the Supreme Court interpreted the subchapter S rules to allow what it acknowledged was a “double windfall” to taxpayers: “Because the Code’s plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.”

· In Wisconsin Central,²⁷ the Railroad Retirement Tax Act provided that railroads had to pay employment tax on “any form of money remuneration.” The Supreme Court held (5-4) that the tax was not payable on income resulting from the exercise of employee stock options, even if the employee elected a cashless exercise, put up no money, and received the spread in cash. Moreover, the statute was held to be so clear that it survived the government’s contrary interpretation in reliance on Chevron step 2.

· In Summa Holdings,²⁸ the Sixth Circuit allowed the taxpayer to avoid the Roth IRA contribution limits by combining a Roth IRA with a domestic international sales corporation. Clearly Congress had never contemplated this combination, and the Tax Court had adopted the government’s substance-over-form argument. The Sixth Circuit reversed in a strongly worded opinion, saying that the literal language of the code must be followed regardless of congressional intent.²⁹ The First Circuit in Benenson then agreed (with a dissent), even after acknowledging that some may call the transaction “clever” and others may call it “unseemly.”³⁰

· In Rite Aid,³¹ a consolidated return regulation disallowed a loss on the sale of stock of a consolidated subsidiary to prevent a duplication of the same economic loss on the subsequent sale of the subsidiary’s assets. Section 1502 granted the secretary very broad authority to write regulations to clearly reflect the income tax liability of a group and prevent avoidance of that tax liability. Still, the court of appeals invalidated the regulation on the ground that section 165 would allow the loss and could not be overridden by the regulation.³²

B. Loper Bright

Loper Bright overrules Chevron and says that courts cannot defer to administrative agencies as in Chevron step 2, but rather must use independent judgment to determine the “single, best meaning” of the statute. Corner Post³³ in effect treats Loper Bright as applying retroactively to the substantive validity of all existing regulations.

This decision changes the inflection points for determining whether a regulation is valid. Under Chevron, the inflection points were 100 percent certainty of the meaning of the statutory language (to determine the applicability of Chevron step 1) and, say, 20 percent likelihood of a statutory interpretation (to allow a regulation taking that position to be valid under Chevron step 2 as a plausible reading of the statute even if not the best reading).

Loper Bright sweeps all this away and creates a single inflection point of 51 percent. The effect is to considerably reduce the ability of Treasury to issue regulatory interpretations of the code. For example, suppose the 80 percent most likely interpretation of a statutory provision is X, but a weak but plausible interpretation (20 percent likely) is Y. Under Chevron step 2, regulations adopting either position X or position Y would be valid. Now, only a regulation adopting position X would be valid.

Under Loper Bright, in determining the best meaning of a statute, a court may be aided by “careful attention to the judgment of the Executive Branch” and should take into account the agency’s “body of experience and informed judgment.” The Court refers several times to the Skidmore³⁴ standard of deference that applied before Chevron. In a later decision upholding a regulatory restriction on ghost guns, the Court cites Loper Bright for the proposition that “while courts must exercise independent judgment in determining the meaning of statutory provisions, the contemporary and consistent views of a coordinate branch of government can provide evidence of the law’s meaning.”³⁵

However, it is not clear what actual level of deference courts will give administrative agencies like Treasury in determining the best meaning of a statute. For example, in National Muffler,³⁶ a pre-Chevron case, the Court gave considerable deference to Treasury in upholding a regulation saying that an exempt business league must represent an industrywide line of business and not only the nationwide franchisees of a single corporation. Likewise, in Mayo,³⁷ the Court relied on Chevron to uphold a regulation saying that the FICA exemption for students regularly attending classes at a school does not apply to individuals who regularly work at least 40 hours a week for the employer.

Those cases may well have come out differently under Loper Bright. In fact, when the D.C. Circuit upheld a whistleblower regulation under Loper Bright after previously upholding it under Chevron,³⁸ the case was criticized for appearing “to have misapplied Loper Bright or, arguably, to have not applied it at all.”³⁹

Moreover, under Loper Bright, courts must respect a statutory delegation of authority to an agency consistent with constitutional limits. The code contains many delegations of authority to Treasury. These range from the very broad delegation in section 1502 authorizing results different from those otherwise provided in the code, to the general authority in section 7805(a) “to prescribe all needful rules and regulations for the enforcement of this title,” and everything in between.⁴⁰ It is unclear what weight the courts will give to any such level of delegation, or if any weight at all will be given to the delegation under section 7805(a).

Much can be written on these questions, and some already has been.⁴¹ At least in theory, a more specific grant of authority in a particular code section might result in a greater level of deference. In fact, Mayo notes that before Chevron, greater deference was given to a regulation authorized by a specific grant of authority than when it was issued under section 7805(a). On the other hand, it is unlikely that more weight would be given to the language of section 7805(a) if Congress amended the code to separately include it in each section.

At times the Court has appeared to give considerable weight even to section 7805(a) standing alone. In the Bob Jones University case,⁴² in relying in part on a revenue ruling to deny tax-exempt status to a racially discriminatory university, the Court said:

Yet ever since the inception of the Tax Code, Congress has seen fit to vest in those administering the tax laws very broad authority to interpret those laws. In an area as complex as the tax system, the agency Congress vests with administrative responsibility must be able to exercise its authority to meet changing conditions and new problems. Indeed, as early as 1918, Congress expressly authorized the Commissioner “to make all needful rules and regulations for the enforcement” of the tax laws. . . . The same provision, so essential to efficient and fair administration of the tax laws, has appeared in Tax Codes ever since, see 26 U.S.C. section 7805(a); and this Court has long recognized the primary authority of the IRS and its predecessors in construing the Internal Revenue Code.

Loper Bright itself involved a delegation of authority similar to that in section 7805(a), but the weight to be given to that delegation was not before the Court, since certiorari was only granted on the question of whether Chevron should be reversed. However, in the recent ghost gun case referred to above, the Court upheld the regulation in question but seemed to give no weight to a delegation of authority very similar to that in section 7805(a).⁴³

H.R. 1, as passed by the House, clearly takes Loper Bright into account in attempting to validly delegate regulatory authority to Treasury. Many of the new tax provisions, which are in Title XI of the bill, authorize regulations necessary (or in some cases necessary or appropriate) to carry out the purposes of the particular section.⁴⁴ Query whether a court might construe “necessary” as being narrower than “necessary or appropriate,” particularly since both formulations are adopted in the same legislation.

Yet I think that the particular statutory formulation of delegation, or the specific test that a court claims to be applying in determining the amount of deference to give Treasury, will not make much difference in practice. As a practical matter, if a court determines that a substantive rule in the statute could be read more or less equally in two ways, there might be deference to Treasury in determining the better reading, regardless of the level of delegation or the test the court claims to be applying. A few courts have already upheld tax regulations after Loper Bright in fact patterns in which there was no obvious inconsistency between the statute and regulations.⁴⁵

At the other extreme, if a court thinks that one reading of a statute is clearly better than the one adopted in regulations, it will likely interpret Loper Bright to mean that Treasury loses, again regardless of the language of delegation or the test the court says it is applying. Most situations that involve Treasury trying to fix statutory glitches or prevent unintended statutory results are almost by definition in this category.

Finally, in some cases there is no underlying substantive statutory provision, and therefore no possible best reading of a substantive rule. For example, there might only be a grant of authority to write regulations on a particular topic, or to define a particular term, or to write regulations that are contrary to a specific code provision. Then the only issue is whether the regulations are within the grant of authority (and that the grant is constitutional).

C. Regulations Closing Statutory Gaps

The sole focus of Loper Bright is on the best meaning of the statute. There is no discussion of a court taking into account the purpose of a particular statutory provision, its legislative history, or whether the literal language is really what Congress might have intended.

This reinforcement of literalism by the Supreme Court will make it even more difficult than it was under Chevron for Treasury to make technical fixes to an imperfectly drafted code provision.⁴⁶ I believe this is a bad result for the tax system and one of the worst consequences of Loper Bright.

This concern is confirmed by cases that have arisen so far under Loper Bright in which taxpayers have challenged various regulations designed to close gaps in the code. To be sure, some of these regulations might have been held invalid even under Chevron step 1. However, Loper Bright is a strong and recent reinforcement of the spirit of literalism. This may have the effect of encouraging the lower courts to follow literalism even more strongly than before, playing it safe rather than taking a significant risk of reversal.

Recent cases holding for the taxpayer include the following.

In Varian,⁴⁷ the Tax Court, in a unanimous reviewed decision, invalidated reg. section 1.78-1(c). The regulation was designed to close a technical glitch in the TCJA that would in effect allow a taxpayer with a 2017-2018 fiscal year to obtain both a credit and a deduction for the same foreign taxes.

The court completely rejected policy arguments, what it called “speculation about Congressional intent,” or “Congress’s overarching purpose.” Rather, it relied strictly on the statutory text. In fact, it used the preamble to the final regulation saying that the regulation was needed to avoid the double benefit as an admission by Treasury of the meaning of the statutory text.⁴⁸ Billions of dollars of tax are at stake on this issue.⁴⁹

Varian also demonstrates that the “absurd results doctrine” is not likely to help Treasury in defending gap-filling regulations. Under that Supreme Court doctrine, as quoted in Varian, the language of the statute can be disregarded if “the result would be so gross as to shock the general moral or common sense” or “if it is quite impossible that Congress could have intended the result . . . and if the alleged absurdity is so clear as to be obvious to most anyone.”

The government did not even claim to be invoking the doctrine in Varian. The court agreed that the doctrine did not apply, quoting language from other cases saying that “a result that may seem odd is not absurd” and “a statute is not absurd if it is at least rational, and the bar for rational is quite low.” If the unintended double benefit in Varian does not trigger application of the doctrine, it is not likely that other statutory glitches (except maybe a mistaken cross-reference) might trigger it.

In FedEx,⁵⁰ the court had previously invalidated under Chevron step 1 a regulation that disallowed foreign tax credits on certain global intangible low-taxed income that was not subject to tax. The government claimed that Loper Bright was better for the government than Chevron because it specifically authorized delegations of regulatory authority that were present in this case. While that argument was itself quite a stretch, the court said that a delegation of authority does not allow a regulation to contradict the plain language of the statute or the single best meaning of the statute. This is a very important point because it means that if the statute is sufficiently clear, any debate about the scope of delegation of authority is irrelevant. Another victory for literalism.

Additional pending cases involving Loper Bright include the following:

· 3M Co. is challenging the validity of the section 482 regulation that disregards some foreign legal restrictions on blocked income in determining an allocation to the U.S. parent. In a reviewed decision before Loper Bright, the Tax Court rejected the taxpayer’s argument under Chevron step 1 and upheld the regulation under Chevron step 2.⁵¹ The case is on appeal to the Eighth Circuit⁵² and oral argument was held last October, so the decision may come down soon.

· Abbott Labs⁵³ and McKesson Corp.⁵⁴ are challenging the validity of the section 482 regulation that takes stock-based compensation into account for cost-sharing arrangements. The issue had been decided favorably for the government in Altera⁵⁵ based on Chevron step 2, over a strong dissent. Enormous amounts of money are at stake.⁵⁶

· The partnership antiabuse rule,⁵⁷ which has no explicit statutory basis, is being challenged in the Tax Court and the Seventh Circuit.⁵⁸ In the Seventh Circuit, the government is relying solely on section 7805(a).⁵⁹

· In Schwarz,⁶⁰ the taxpayer lost a hobby loss case in the Tax Court. At the taxpayer’s request, the court asked for detailed briefing on the validity of the underlying section 183 regulation in light of Loper Bright.⁶¹

Other final and proposed anti-taxpayer regulations, including some designed to prevent transactions Treasury considers abusive, are also likely to be challenged by taxpayers under Loper Bright. Some examples are:

· The regulation on “extraordinary dispositions,”⁶² designed to close a glitch in the effective date provisions of the TCJA that allows income of a fiscal-year controlled foreign corporation to be exempt from GILTI and also to be returned tax-free as a dividend under section 245A. Liberty Global challenged this regulation, but the court did not reach the Loper Bright issue because it held that the temporary regulation in question was invalid as a violation of the APA.⁶³ It later held⁶⁴ that the same transaction violates the statutory economic substance doctrine (ESD).⁶⁵ Nevertheless, the case is on appeal, and the validity of the regulation under Loper Bright will no doubt be decided in this lawsuit or litigation by other taxpayers.

· The regulation on “extraordinary reductions,”⁶⁶ fixing an erroneous statutory formula that results in the exclusion of GILTI when the stock of a CFC is sold in the middle of the year. This issue, unlike the issue of extraordinary dispositions, is a permanent issue with major ongoing revenue implications.

· The recently finalized dual consolidated loss regulations under section 1503(d) that take into account locally deductible payments from a disregarded foreign subsidiary to its U.S. parent.⁶⁷ The deductions do not exist for U.S. tax purposes, and the statute does not explicitly prevent the use of hybridity to obtain a local deduction that is not subject to the statutory restrictions.

· The proposed regulation under the 1 percent excise tax on stock buybacks that would impose the tax when a U.S. subsidiary funds a buyback made by its foreign parent.⁶⁸

· The regulation treating partners in a partnership that are S corporations as subject to the carried interest rule in section 1061,⁶⁹ even though that section excludes corporate partners from its scope.

· The regulations adopted in 2022 that limit FTCs, although those are not yet in effect.⁷⁰

· The regulation providing that a pledge of two-thirds of the stock of a CFC by a U.S. shareholder can be considered an indirect pledge of the assets of the CFC, resulting in an income inclusion under section 956.⁷¹

· The regulation under section 385 saying that a corporate debt instrument issued to an affiliate as a dividend is generally treated as equity, and the related per se funding rule that automatically treats a debt instrument issued to an affiliate for cash as equity if certain conditions are satisfied.⁷²

Other authors have also questioned the validity of (1) several additional regulations that significantly affect major industries,⁷³ (2) the anti-chaining regulations concerning renewable energy tax credits,⁷⁴ (3) the recently adopted branch currency regulations under section 987,⁷⁵ and (4) conditions imposed by the section 6724 regulations for satisfying the reasonable cause defense under that section.⁷⁶

Some of the regulations concerning inversion transactions under section 7874 might also violate Loper Bright. However, the penalties for having a bad inversion are so great that taxpayers are not likely to knowingly violate the regs based on a belief in that invalidity. Because these regulations cannot be challenged in advance of a transaction, they have an in terrorem effect. This inability to challenge significant anti-taxpayer regulations in advance is itself bad for the tax system.

Finally, the Bob Jones University case denied section 501(c)(3) status to a racially discriminatory university, partly in deference to a revenue ruling.⁷⁷ While the Court also relied on other factors, it is not clear whether the result would be the same after Loper Bright.⁷⁸ In any event, the holding should still be valid because Loper Bright states that it does not overrule prior cases. This Loper Bright issue even came to the attention of The Wall Street Journal editorial board in the context of Harvard University.⁷⁹

D. Antiabuse Rules

Even though Loper Bright has limited the ability of Treasury to close gaps in a statute by regulation, taxpayers are still subject to antiabuse rules such as the ESD. Those rules are now more important than ever to the IRS to prevent taxpayers from taking advantage of the literal terms of the code in ways unintended by Congress, with the potential for enormous revenue loss. For example, Rev. Rul. 2024-14, 2024-28 IRB 18, applies the ESD to contrived transactions intended to result in partnership basis shifting that complies with the literal terms of the code (although Notice 2025-23, 2025-19 IRB 1428, states an intent to withdraw a disclosure requirement that would make it easier for the IRS to discover those transactions). There are reportedly “dozens and dozens of audits” currently in progress concerning these transactions.⁸⁰

To be sure, the ESD is a second-best tool for the IRS. Many gaps in the code provide unintended tax benefits to taxpayers not going out of their way to take advantage of the benefit, and no antiabuse rule will prevent that result. Even when taxpayers plan into a benefit unintended by Congress, application of the ESD requires a detailed and time-consuming examination of the facts in each case, and taxpayers always claim a business purpose for each step in a transaction.

Despite the increased importance of doctrines such as the ESD, it is possible that future court decisions will cite Loper Bright as a reason to weaken those doctrines. To be sure, nothing in Loper Bright even hints that the best meaning of a statutory provision is to be determined without regard to common-law doctrines such as step transaction or substance over form.

There is even less reason for Loper Bright to affect antiabuse rules that are in the code itself, including the ESD. After all, even Chevron step 1 did not prevent these doctrines and the ESD from being routinely used to stop transactions that complied with the literal terms of the statute. In fact, the ESD is only needed when a transaction complies with the literal requirements of the code, so an exemption for literal satisfaction of the code would read the ESD entirely out of the code.

Still, the thrust of Loper Bright and the literalism approach generally are to take away the power of regulatory agencies to use their discretion to make law. Courts could use this general approach to narrow the scope of doctrines such as the ESD. A weakening of the ESD by the courts in light of Loper Bright seems very possible.⁸¹ This would be an extremely unfortunate result for the tax system and could lead to enormous revenue losses from transactions with little substance that satisfy the literal terms of the code.

This question may be answered relatively quickly. The ESD only applies when it meets the statutory requirement of being “relevant.” The possible interpretations of relevance are: (1) the ESD is automatically relevant whenever the taxpayer fails the substantive statutory tests that require a business purpose and change in economic position; (2) the ESD is relevant if, and only if, the result is unintended by Congress; and (3) the ESD is never relevant if the tax results of the transaction are determined by a clear statutory provision. I believe that (2) is clearly the correct interpretation because (1) reads the relevance requirement out of the code and (3) reads the entire ESD out of the code.

Several courts are considering this question. The district court in Liberty Global⁸² upheld application of the ESD to particular facts by relying on interpretation (1) above. While I believe the holding was correct under interpretation (2), the court never reached this issue. The case is on appeal to the Tenth Circuit.

The Tax Court is also considering the scope of the ESD in several cases. In Otay,⁸³ the commissioner is using the doctrine to disallow a partnership basis-shifting transaction giving rise to a $867 million basis increase in assets. The taxpayer argues for interpretation (3):

Respondent attempts to negate the plain text of section 743(b) by relying on the economic substance doctrine. Where, as here, the tax consequences are mandated by the clear terms of the law that Congress enacted, respondent cannot deploy the economic substance doctrine to override that law to achieve his preferred outcome.⁸⁴

In Patel⁸⁵ and Farmers and Merchant Bancshares,⁸⁶ the issue is whether the ESD can be used to recharacterize premiums paid to captive insurance companies.

E. Taxpayer Reliance on Pro-Taxpayer Regulations

Another issue raised by Loper Bright is whether a taxpayer can rely on a regulation that is more favorable to it than the best reading of the statute. The issue did not come up in Loper Bright, in which the only issue was the amount of deference to be granted to an administrative agency in interpreting the underlying statute. As a result, it might be assumed that despite Loper Bright, the government would be estopped from challenging the application of its own regulation to a taxpayer on the basis that the regulation was too taxpayer-favorable and therefore invalid under Loper Bright.

However, that assumption may be incorrect. In Memorial Hermann,⁸⁷ the taxpayer claimed tax exemption under section 501(c)(4) based on the “primary purpose” test in the regulations. The court instead concluded that the exemption did not apply because the stricter standard in the statute was not satisfied. The court said that under Loper Bright, it was no longer required to give Chevron deference to Treasury’s interpretation of the statute, and “the IRS’s embrace of a legal standard cannot supplant our independent interpretation of statutory text.”

This conclusion was technically an alternative holding because a footnote at the end of the opinion said that the taxpayer would not have satisfied the regulation anyway. However, the focus of the opinion was on the taxpayer’s failure to satisfy the statute. It does not appear that the taxpayer even claimed that the government was bound by the more taxpayer-favorable regulation on the basis of estoppel.

Before Loper Bright, it was clear that the IRS cannot take a position contrary to a revenue ruling,⁸⁸ and a regulation should be even more binding on the IRS. There is also no reason to think that Loper Bright changed prior law on estoppel. Therefore, taxpayers should logically still be able to rely on a regulation.

To be sure, taxpayers cannot rely on a revenue ruling (or a regulation) after the underlying statute has been changed. For an existing regulation that was valid solely on account of Chevron, it could be argued that Loper Bright is analogous to a change in law that would prevent a taxpayer from placing future reliance on the regulation as opposed to the best reading of the statute. This argument would not apply to a regulation that had been specifically upheld under Chevron, because Loper Bright says that those cases were not overruled.⁸⁹

However, a significant portion of current tax practice followed by taxpayers and accepted by Treasury is based on regulations that are likely not the best reading of the code, and few of those have been subject to a Chevron review. If Loper Bright allows the government to disregard its own pro-taxpayer regulations and impose tax based on a less-taxpayer-favorable statute, significant portions of routine nonabusive tax planning and tax practice will be thrown into chaos. Among other things, every action by taxpayers and every tax opinion will have to be based on a determination of whether a favorable regulation intended to be relied on by the taxpayer is consistent with the best reading of the code. In many cases the answer may be unclear or no.

That inability to rely on outstanding tax regulations would not be good for the tax system. There is also no need for Treasury to have the power to override outstanding regulations in this manner. Treasury is already undertaking a review of outstanding regulations and will revoke those it considers invalid under Loper Bright. As a result, I hope Memorial Hermann is an outlier that will not be followed by other courts when the estoppel argument is raised.

F. The Nondelegation Doctrine

Loper Bright says that when a statute delegates discretionary authority to an agency, the role of the court is to “effectuate the will of Congress subject to constitutional limits.” This is said to involve, “recognizing constitutional delegations.”⁹⁰ Again, Congress may confer discretionary authority on agencies “subject to constitutional limits.”⁹¹ And again, as part of the conclusion, “when a particular statute delegates authority to an agency consistent with constitutional limitations, courts must respect the delegation.”⁹²

These consistent references to constitutional delegations naturally raise the question of when a delegation of authority to an agency might be unconstitutional. To the extent a delegation is unconstitutional, Treasury would at least nominally receive less deference from courts in writing regulations. In my view, a significant constitutional limitation on delegations would be bad for the tax system.

The long-standing Supreme Court rule has been that a delegation is constitutional if it provides the agency with an “intelligible principle” to follow.⁹³ However, the only Supreme Court case ever to hold that a delegation was unconstitutional was in 1935.⁹⁴

Under this test, the more general the delegation, and the fewer standards for Treasury to apply, the more likely that a court will hold that the delegation has no intelligible principle and is unconstitutional. The most general delegation in the code is section 7805(a), authorizing “all needful rules and regulations for the enforcement of this title.”

In 1940 a leading commentator discussed the constitutionality of the predecessor of this provision:

The great majority of the regulations issued by the Treasury Department are based upon the general rule-making power of Section 62. It will be noted that this section contains no Congressional standard or guide of any kind, nor does the income tax title of the Code anywhere set forth a standard for administrative action to which Section 62 might be related. If this section were to be construed as conferring on the Commissioner an unlimited power to make rules having the force and effect of law, it would be a plainly unconstitutional delegation of power.⁹⁵ [Emphasis added.]

Of course, this view was stated a mere five years after the Supreme Court had invalidated a regulation for the first time, without the knowledge that there would be no further invalidation for the next 85 years. Moreover, it can be argued that the tax law is so complicated and specialized that a very general delegation in that area is more constitutionally justified than in other areas. In fact, the Tax Court in Foster⁹⁶ upheld the constitutionality of the very general delegation provided in section 482. That provision allows the reallocation of income if “necessary in order to prevent evasion of taxes or clearly to reflect the income” of related parties. The court said that this was a “meaningful standard.”⁹⁷

On the other hand, the commentator may have been prescient. The court in Loper Bright downplayed the need for judicial expertise in interpreting statutes. Further, Foster can be distinguished because the court relied in part on the fact that the commissioner’s exercise of discretion under section 482 is judicially reviewable. That argument makes sense in the context of a grant of authority to make a specific proposed allocation under section 482, but it would not be easily applied in determining the constitutionality of a grant of authority to write regulations.

If the delegation in section 7805(a) is not constitutional, Treasury will have no valid delegation to issue regulations over large portions of the code. This could limit the courts’ willingness to defer to Treasury regulations. On the other hand, how much additional deference would result from even a valid delegation of authority is unclear, except perhaps when the statute is truly ambiguous.

Other broad delegations of authority in the code might also raise a constitutional issue. For example:

· Section 337(d) authorizes regulations necessary or appropriate to carry out the purposes of General Utilities⁹⁸ repeal.

· Section 385(b) authorizes regulations to provide factors (literally without limit) to distinguish debt from equity. Regulations have interpreted this authority very broadly.

· Section 1275(d) authorizes modification of the usual statutory rules concerning original issue discount and related provisions if, by reason of certain identified circumstances or “other circumstances,” the statutory rules do not carry out the purposes of the subpart. Treasury has interpreted this authority very broadly.⁹⁹

· Section 7701(l) authorizes regulations to recharacterize multiparty financing transactions as being directly between two or more of the parties “if appropriate to prevent avoidance of any tax imposed by this title.”

· Section 482 may or may not be considered to involve a delegation of authority.¹⁰⁰

· Section 1502 authorizes consolidated return regulations, including regulations that are different from the rules for nonconsolidated corporations to clearly reflect the income of the group.

In the first four instances, the consequence of a finding of unconstitutionality would presumably be the invalidation of one or more particular regulations, but the related provisions would remain coherent. In the section 482 situation, presumably a court would have to determine the proper transfer price by giving limited or no deference to the regulations or the IRS’s position. In the consolidated return matter, there are no underlying code provisions, and the Supreme Court would face a real dilemma concerning the consequences of a holding that the delegation of authority was unconstitutional.

Most recently, section 110101 of H.R. 1 as passed by the House adds new code section 224, allowing a deduction for “qualified tips.” A number of conditions must be satisfied, including “such other requirements as may be established by the Secretary.” This delegation is so open-ended that its constitutionality seems questionable under any standard.

At least some guidance in determining the scope of the nondelegation doctrine will likely come in the very near future. The Supreme Court is considering the scope of the constitutional delegation power in the FCC¹⁰¹ case. In fact, the repeated references to the constitutional limitation in Loper Bright are a clear precursor to a decision in that case.

FCC involves a delegation of authority to the FCC to set the amount of fees payable by common carriers to a fund used to subsidize universal telecommunications service.¹⁰² The statute provides several principles for the FCC to use in defining universal service and therefore for determining the fees that will be necessary to fund the services. The list of principles is followed by the catchall, “such other principles as [it] determines are necessary and appropriate for the protection of the public interest, convenience, and necessity and are consistent with this chapter.”¹⁰³

The case is especially relevant to the tax law in several respects.

First, the foregoing statutory standard is very similar to that in section 7805(a). Moreover, the government concedes in its reply brief that an intelligible principle is not enough for a delegation. It says:

Distinguishing lawful conferrals of discretion from unlawful delegations requires more than just asking in the abstract whether there is an “intelligible principle.” Congress must delineate both the “general policy” that the agency must pursue and the “boundaries of the delegated authority.” And “the degree of agency discretion that is acceptable varies according to the scope of the power congressionally conferred.” Further, the guidance must be “sufficiently definite” to permit meaningful judicial review of agency action.¹⁰⁴ [Emphasis added; internal citations omitted.]

In principle, the current standard or a new standard such as this should not give different results in most cases. For example, an intelligible principle would normally by its terms create boundaries and permit meaningful judicial review of regulations. However, as a practical matter, if the Supreme Court reformulates the test for authorized delegations along the lines suggested in the brief, courts will clearly be encouraged to give less deference to Congress in evaluating the constitutionality of delegations. This could be particularly important in evaluating cases in which the code contains a very general delegation of authority for regulations on a particular issue.

Second, one issue in the case is whether the rate-setting power of the FCC is in effect a taxing power. Assuming it is, opponents of constitutionality claim that Congress has less power to delegate the taxing power than other powers, because the Constitution explicitly grants the taxing power to Congress. The government claims that Congress has the same power to delegate for tax as for anything else, consistent with prior Supreme Court case law.¹⁰⁵

No one, not even the government, is arguing that there is more power to delegate in tax than in other areas. As a result, the decision will clearly not support, and could expressly reject, the argument that there is a broader constitutional right to delegate in tax because of the inherent complexity of the code.

It could also be argued that even if the Court says that the power to set tax rates (at issue in FCC) is a core congressional function that cannot be delegated, the same restrictions should not apply to the power to issue regulations interpreting a tax statute that has already been adopted by Congress. However, the power to set the tax rate is not much different in principle than the power to set the tax base, which is what most regulations do.

Third, the FCC relied on a third party to recommend the level of fees, and it generally followed the recommendations. Consequently, if the fees are treated as taxes, the case raises the question of whether Congress can allow a nongovernmental third party to determine (legally, or as a practical matter) federal income tax liabilities. This issue is relevant for any code section that bases income tax liability on book income, including the corporate alternative minimum tax and section 451(b) (requiring certain income inclusions not later than their book inclusions). Likewise, sections 831 and 832 impose tax on insurance companies based on financial statements approved by the National Association of Insurance Commissioners.

The government’s primary position is that there was no delegation to the third party because its recommendations were not binding on the FCC. However, the government’s reply brief contains the following language:

The government agrees there would be a nondelegation problem if an agency empowered a private actor to adopt rules without the agency’s approval. Indeed, empowering that private actor to adopt binding rules governing private conduct on a continuing basis would make that actor an officer of the United States subject to the Appointments Clause, U.S. Const. Art. II, section 2, Cl. 2. But the FCC has not granted such authority to the Administrator, whose projections “must be approved by the Commission before they are used to calculate the quarterly contribution factor.”¹⁰⁶ [Emphasis added.]

If an agency’s subdelegation of authority to a private third party would violate the appointments clause, the logic would mean that Congress could not do so directly. It would then be unclear whether Congress can allow tax liabilities to be determined in part by the Financial Accounting Standards Board definition of book income, although arguably this would be permissible based on the SEC’s relationship with the FASB.

It could also be argued that federal tax law deferring to the FASB is no different from deferring to, say, a foreign country setting its own tax rates that determine the federal FTC, or to a state that sets the state taxes that are deductible for U.S. tax purposes. In all those cases, the third party is not directly determining federal income tax liability but rather making a determination for nonfederal income tax purposes that Congress has chosen to incorporate into the code.

Oral argument in the case was held March 26. Based on the arguments, the delegation in that case may well be upheld, but the Court is likely to adopt a stricter standard for allowing delegation than the old standard.¹⁰⁷ This could reduce or eliminate the ability of Treasury to rely on section 7805(a) in obtaining constitutional deference under Loper Bright.

This outcome would be unfortunate to the extent that courts would otherwise have been willing to rely on section 7805(a). The result could be much more tax litigation and different tax rules in different parts of the country. Future tax legislation will have to be much more detailed and provide for extensive and specific grants of authority to Treasury. Yet the more detailed the legislation, the more room there is for technical errors that need correction.¹⁰⁸ The more detailed a grant of authority, the greater the chance that something will be missed. I believe these results would not be good for the tax system.

G. Implementation Problems

Loper Bright is likely to increase uncertainty and instability in the tax system for several reasons. The case has clearly increased the likelihood of many regulations being invalidated, even those already vulnerable under Chevron step 1. As a result, taxpayers now have a much stronger basis for taking the position on their tax returns that a variety of regulations are invalid. If taxpayers take that position and are audited, they will likely obtain a better settlement with the IRS and have less risk of penalties, even if the regulation would ultimately be upheld by a court.

The risk of audit is also reduced because of the pending reduction in the size of the IRS’s audit division. It is not surprising that current news reports indicate that taxpayers intend to take more positions contrary to adverse regulations, and if necessary, to challenge their validity in court.

Moreover, many regulations help some taxpayers and hurt others compared with the best reading of the statute.¹⁰⁹ A taxpayer benefiting from a regulation can follow it, and a taxpayer hurt by the regulation can claim it is invalid. This is a whipsaw against the government and is bad for the tax system. Of course, the same result could have arisen before Loper Bright, but that case exacerbates the situation. More regulations are arguably now invalid, whether or not they will actually be found to be invalid.

Even worse for the tax system, taxpayers will be able to take advantage of the uncertain validity of a regulation for many years after it is issued. After a regulation is published in final form, it can easily take five years or even much longer for a final determination of validity. The process is lengthy: The taxpayer files a return claiming invalidity of the regulation; the return is audited; perhaps the issue is reviewed in the IRS Office of Appeals; the IRS issues a notice of deficiency; a lower court issues a decision; a court of appeals issues a decision; and possibly there is a petition for rehearing en banc in the court of appeals and a petition for certiorari. In the meantime, many taxpayers will have continued to take the position of invalidity, again with less risk of audit and penalties. Even if the regulation is eventually upheld, years will have gone by without any collection of the correct amount of tax.

Further, there is likely to be an increase in the number of courts reaching different conclusions on validity. This is because more cases will be litigated, and there is likely to be much less agreement on whether a regulation is the best reading of the statute under Loper Bright than there was on whether a regulation is a reasonable interpretation under Chevron.

In addition, while Loper Bright says it does not overrule prior cases upholding regulations based on Chevron, a court not bound by a prior decision is not likely to give it much weight in deciding cases under Loper Bright. This will further increase the number of circuit splits even when there is no disagreement on the best meaning of the statute. For example, suppose a regulation adopts an interpretation of a statute that everyone agrees is plausible but not the best meaning. A circuit court deciding the validity of the regulation before Loper Bright would have upheld the regulation under Chevron, and that holding remains binding precedent in that circuit. However, a different circuit deciding the case after Loper Bright might reject the validity of the regulation under the best meaning test.

The Supreme Court won’t have the ability or interest to decide all or possibly any of these circuit splits, especially because Loper Bright is not limited to tax. As a result, different regions of the country may eventually be subject to different tax laws. This will also greatly increase electivity by taxpayers in circuits that have not decided the particular issue, because taxpayers will reasonably be able to follow either the regulation or the courts in other circuits. The Tax Court, which follows the law of the circuit to which an appeal lies, will likely also be deciding more cases in different ways depending on the location of the particular taxpayer.

It is also unclear whether a court such as the Tax Court that upheld a regulation previously under Chevron will follow its own precedent, or whether it will apply the Loper Bright standard to a new case. Loper Bright authorizes it to follow the precedent, but an appeal will go to a court that will not be bound by the lower court precedent and that will consider the case solely under Loper Bright. The Tax Court is now facing this issue.¹¹⁰ Finally, in a situation in which there is no regulation and different courts have interpreted the code differently, it is less likely under Loper Bright than under Chevron that a regulation could resolve the disagreement.

These factors could result in an enormous amount of taxpayer uncertainty and electivity and a considerable revenue loss to the government, even for regulations that are eventually upheld. Again, while these consequences can arise today, they are more likely to arise under Loper Bright’s stricter test of validity. Even if Loper Bright turns out not to materially increase the number of regulations that are held invalid, it will be many years before this is determined. In the meantime, taxpayers will be able to claim that more regulations are invalid under the Loper Bright standard, with the same electivity and other adverse consequences to the tax system.

H. Burdensome Requirements to Issue Regulations

Loper Bright and recent court decisions have imposed burdens on Treasury that make it much more difficult for it to issue regulations in a timely manner. I believe this is bad for the tax system.

First, Loper Bright increases the burden on Treasury to write expansive preambles to proposed and final regulations. The lack of Chevron deference means that a court is likely to determine whether a regulation is the best reading of the statute by taking into account the preamble to determine Treasury’s rationale for a regulation. Skidmore says that the weight to be given an agency’s interpretation depends on factors including “the thoroughness evident in its consideration” and “the validity of its reasoning.” As a result, preambles are now likely to be written like briefs for the government. Thus, Loper Bright will likely slow the regulation process and greatly expand the length of preambles to proposed and final regs.¹¹¹

Second, the APA requires that issuance of final regulations be accompanied by “a concise general statement of their basis and purpose.”¹¹² This has been interpreted in recent years to require the agency to respond to all significant comments on the proposed regulations. For example, the Tax Court decision in Altera invalidated a regulation in a reviewed decision with no dissents.¹¹³ One of the stated reasons for invalidation was Treasury’s failure to respond to significant comments. While the holding was reversed on appeal on the ground that the response was adequate, a dissent made the same point, and the Tax Court might stick to its position in cases involving appeals to other circuits. The Tax Court also invalidated a regulation on conservation easements for the same reason in another reviewed decision, Valley Park Ranch.¹¹⁴ It said that the regulation was “procedurally invalid under the APA because Treasury failed to respond to a significant comment.”

By contrast, 3M¹¹⁵ involves the validity of a regulation involving blocked foreign income under section 482. The taxpayer claimed an APA violation because of comments to the regulation proposed in 1993 that it agreed Treasury considered but for which it claimed Treasury did not give an adequate response. While the Tax Court rejected these arguments, six judges issued a strong dissent on this issue and the case is on appeal.

Thus, even aside from Loper Bright, Treasury is now justifiably concerned that any comment it does not specifically respond to may invalidate the relevant portion of a regulation. This has placed an enormous burden on Treasury to track comments and ensure that it responds to each one. The problem is exacerbated by the fact that taxpayers will soon be able to use artificial intelligence to easily send in comments — if they are not doing so already. The coherence of the comments might not even matter. In theory, massive numbers of comments could be submitted in bad faith to make it impossible, as a practical matter, for Treasury to respond to all the comments and issue the final regulations.

Moreover, most existing regulations were adopted before case law within the last 15 years determined that the APA fully applies to all tax regulations and that preambles must be very detailed. Previously, preambles were much shorter and often very general, based on Treasury’s position that the APA did not apply to interpretative as opposed to legislative regulations. Therefore, the ability to challenge old regulations based on subsequently developed standards could adversely affect the validity of many past regulations, even though Treasury was acting in good faith at all times.

For example, in 3M, the proposed regulation was issued in 1993. The dissent would have invalidated the regulation in 2023 on the ground of inadequate responses to comments, even after acknowledging that the case law requiring detailed responses did not exist until 2011 (the Mayo case). The dissent acknowledges that this puts Treasury in an “unfortunate predicament” that “may seem unfair,” but says that this is a problem to be resolved by “Congress (or perhaps the Supreme Court).”¹¹⁶

So now, any taxpayer unhappy with a regulation can search through the comments to see if there was a comment on an issue relevant to the taxpayer that did not give rise to an adequate response. With any luck, the taxpayer will find one and have a legitimate procedural challenge under the APA.

This windfall to taxpayers makes little sense. Taxpayers should not be substantively affected by the existence or nonexistence of a sentence or two in a preamble to a final regulation that they were not even aware of until they began searching. Of course, Treasury shouldn’t be able to freely avoid compliance with the APA without penalty. However, except in cases of bad faith, such as intentional noncompliance by Treasury or the IRS, I do not believe that allowing such a challenge is good for the tax system.

In that regard, it is not clear under Corner Post whether an APA challenge to a regulation can be made at any time, or whether it must be made within six years of the regulation’s promulgation. For a claim that a regulation violates Loper Bright, the case holds as a practical matter that the injury that begins the six-year statute of limitations in the APA can occur at any time. But a footnote leaves open the possibility that the injury for a violation of a procedural requirement of the APA in promulgating a regulation might arise on promulgation.¹¹⁷ To avoid the adverse effects on the tax system of an unlimited statute of limitations for procedural APA challenges, I hope that future case law will hold that the statute begins on the promulgation of the regulation.

Third, at least one court has shown unrealistic expectations about Treasury’s ability to write timely regulations, further burdening the regulation-writing process. Section 7805(b)(3) allows regs to be retroactive to the date of enactment of legislation if they are issued within 18 months of enactment. A few days before the end of that period for the TCJA, Treasury issued temporary regs to prevent fiscal-year CFCs from having income that would be both exempt from GILTI and not taxable when paid as a dividend to shareholders.

Treasury relied on the “good cause” exception in the APA to issue the temporary regs without the usual notice and comment period. The good cause was the pending expiration of the 18-month period and the need for retroactivity to eliminate the gap in the statute.

Even if final regulations are made retroactive after notice and comment, temporary regs issued when final regs are first proposed are necessary for Treasury to quickly stop transactions it considers abusive. Taxpayers can rely on a statute and disregard a regulation that is only proposed when they file their tax returns, and there is no obligation to file an amended return even if the regulation is finalized retroactively. Moreover, proposed regs disclose transactions to taxpayers otherwise unaware of them, so they can also engage in transactions before the proposed regs are finalized. A temporary reg issued simultaneously with the proposal of the final reg avoids these possibilities.

Nevertheless, in Liberty Global,¹¹⁸ the court rejected the good cause argument and invalidated the regulation on the ground that it violated the APA. The court said that 18 months after enactment was plenty of time to propose and finalize a regulation under the usual APA procedures. Moreover, even though Treasury did not find out about the relevant transactions until seven months after enactment, the remaining portion of the 18-month period should have been enough time for the normal process. As the court said, “If the deadline could not have been met if an opportunity for notice and comment had been given, and retroactivity would thereby have been lost, I would find that to be good cause. However, that has not been shown.”

This holding shows no appreciation for the process of drafting an entirely new proposed regulation and preamble with coordination between Treasury and IRS, publishing it in the Federal Register, receiving many lengthy comments, reviewing comments, writing a new regulation and preamble with coordination between Treasury and IRS, obtaining internal approvals, and getting the final regulation published in the Federal Register. Rarely, if ever, has this been done in seven months.

To be sure, section 7805(b) has another exception allowing retroactivity if necessary to prevent abuse, and this should satisfy the good cause exception in the APA also. However, the scope of that provision is unclear, and abuse may not include the case of taxpayers taking advantage of clear gaps in the statute. Perhaps for that reason, Treasury did not rely on that exception in promulgating the temporary regulation in Liberty Global. Further, courts such as the Liberty Global court might conclude that even this exception cannot be relied on if there is sufficient time to go through the usual procedure. As a result, the issuance of temporary regs to obtain retroactivity under the 18-month rule may become impossible as a practical matter. Another bad result for the tax system.

I. No Standing to Challenge Pro-Taxpayer Regulations

It is well established that no one has standing to challenge a pro-taxpayer tax regulation; that is, to claim that a regulation is invalid because it allows other taxpayers not to pay the taxes that the code itself requires them to pay. The rationale is that the increased taxes that Congress might choose to impose on Taxpayer A to offset the ability of Taxpayer B to save taxes because of an invalid pro-taxpayer regulation is too speculative and indirect a harm to Taxpayer A to give it standing to challenge the regulation.¹¹⁹

The result is a one-way street in favor of taxpayers and against the fisc. Anti-taxpayer regulations intended to fix unintended pro-taxpayer results in the statute can be challenged by taxpayers and will now be invalidated by courts if contrary to the best reading of the statute. Pro-taxpayer regulations, either fixing unintended anti-taxpayer results in the statute or granting benefits beyond the best reading of the statute, remain in place unless Congress or Treasury acts.

As a policy matter, there is no more reason for Treasury to be able to permit the collection of less tax revenue than specified by Congress than there is for Treasury to be able to require taxpayers to pay more in taxes than specified by Congress. The standing rule allows the former but not the latter.

This unbalanced system is also inconsistent with the rationale of Loper Bright, which was based on the APA’s rule that courts are to be the ones to determine the best reading of a statute. Obviously, the APA does not distinguish among statutes depending on which party is helped or hurt. Moreover, the Court objected to “the deference that Chevron requires of courts reviewing agency action.”¹²⁰ In fact, the lack of taxpayer standing means that, in practice, Treasury still has more than Chevron deference on the pro-taxpayer side of the ledger, just as it did before Loper Bright.

Likewise, Loper Bright rejects the position that statutory ambiguities are implicit delegations to agencies.¹²¹ Yet the lack of taxpayer standing results in an implicit delegation as long as the regulations stay on the pro-taxpayer side of the best reading of the statute.

Similarly, Loper Bright says that Chevron fosters unwarranted instability and undermines the rule of law because it allows agencies to change course even in the absence of new legislation.¹²² Yet this is still true under Loper Bright as long as the result of any change is no worse for taxpayers than the best reading of the statute. For example, regulations that are the best reading of the statute can be changed to be more pro-taxpayer. Regulations that are more pro-taxpayer than the best reading of the statute can be changed in either direction as long as the result for taxpayers is no worse than the best reading of the statute.

In a real-world example, Treasury clearly tried to fix some of the unintended pro- and anti-taxpayer errors in the TCJA. The result is that taxpayers will now get the best of both worlds. They can keep the unintended statutory benefits because they can successfully challenge the contrary regulations. They can avoid the unintended statutory detriments because they can rely on the invalid pro-taxpayer regulations that no one has standing to challenge.

I have long considered this lack of balance a major problem in the tax system and have written about it elsewhere.¹²³ Loper Bright makes the problem much worse by heightening the standard for validity. More anti-taxpayer regulations can and will be challenged under the new standard, but pro-taxpayer regulations still cannot be challenged. The potential gap between the two positions and the unjustified loss to the fisc is thereby increased.

IV. Executive Branch

Treasury now has several issues to consider and decisions to make, partly in light of Loper Bright. In my view, some of the possible outcomes would improve the state of the tax system, but others would substantially worsen it. Time will tell.

A. Review of Existing Regulations

1. Procedure.

Shortly after Loper Bright, several Republican members of Congress wrote to then-Treasury Secretary Janet Yellen asking for a list of all the Biden administration regulations that might be affected by Loper Bright if they were challenged in court. I wrote that if that review were undertaken by the current or a future administration, the review should cover all past regulations rather than being limited to Biden administration regulations, and should include both pro-taxpayer and anti-taxpayer regulations.¹²⁴ Sure enough, in light of subsequent developments, my proposal may come to pass, although that may be wishful thinking.

First, on February 19, the president issued Executive Order 14219, “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative.” The EO requires every agency to identify outstanding regulations that are based on (1) anything other than the best reading of the underlying statutory authority or prohibition, or (2) unlawful delegations of legislative power. Notably, there is no limitation on when a regulation was issued or whether it helps or hurts taxpayers.

Within 60 days of the EO (which has now passed), a list of these regulations was to have been provided to the Office of Information and Regulatory Affairs in the Office of Management and Budget. OIRA will then consult with agency heads to develop a regulatory agenda “that seeks to rescind or modify these regulations, as appropriate.” The EO also directs “de-prioritizing actions to enforce regulations that are based on anything other than the best reading of the statute,” and possibly terminating enforcement proceedings in these cases.

Second, on April 4, Treasury and the IRS issued Notice 2025-19, 2025-17 IRB 1418, their annual request to the public for recommendations for items to be included on the 2025-2026 priority guidance plan. The request says that Treasury and the IRS will consider whether the recommendations relate to regs potentially described in EO 14219, including those based on anything other than the best reading of the statute or an unlawful delegation of legislative power. Comments were due by May 30.

Third, a White House memorandum was issued April 9, titled “Directing the Repeal of Unlawful Regulations.” It says that after the end of the 60-day period stated in EO 14219, agencies will immediately take steps to repeal any regulation that “clearly exceeds the agency’s statutory authority or is otherwise unlawful.”

Moreover, agencies are instructed to finalize that repeal without the notice and comment normally required under the APA. The rationale is that the good cause exception to notice and comment requirements in the APA applies, because in the case of a facially unlawful regulation, those procedures would be unnecessary and contrary to the public interest. Further, within 30 days after the end of the review period, the agency must identify to OIRA any “unlawful or potentially unlawful regulations” that have not been targeted for repeal.

Fourth, on April 14, the IRS issued Notice 2025-22, 2025-19 IRB 1427, in reliance on EO 14219. It revokes nine published guidance documents on the ground that they are obsolete, and says that Treasury and the IRS “anticipate revoking or obsoleting hundreds of similar guidance documents in the near future.”

Finally, and most recently as of this writing, on April 15, Treasury published a final rule, without a preceding proposed regulation, “Eliminating Unnecessary Regulations.” The final rule announced the removal of several nontax regulations on the stated ground that they are no longer necessary or applicable. The regs are to be repealed effective June 16, unless significant adverse comments were received by May 15, in which case the repeal would not take effect.

These directives raise several issues.

First, they do not distinguish pro- and anti-taxpayer regulations. Thus, at least in principle, recommendations for the revision of both categories of regs that are invalid under Loper Bright will be considered and acted on. Under the White House memorandum, any pro-taxpayer regs that violate Loper Bright and are not to be withdrawn must be identified to OIRA with a reason for their nonwithdrawal.

In any event, Treasury has requested recommendations for regulations to be withdrawn, and I hope bar associations and other public interest groups will respond with balanced suggestions on the validity of both pro- and anti-taxpayer regulations. Because the great majority of comments will likely object to anti-taxpayer regs, Treasury should use its best efforts to ensure that its obligations under the directives are carried out in a balanced manner.

Moreover, it is not always clear whether a regulation helps or hurts taxpayers. Many regs help some taxpayers and hurt others. Even a regulation that appears to be anti-taxpayer may help some taxpayers in unexpected ways, or vice versa.¹²⁵ Taxpayers hurt by a regulation can always challenge it in court under Loper Bright, so in a clear case, it would be good for the tax system if Treasury revoked the regulation and avoided the need for litigation.

Second, EO 14219 and the White House memorandum required Treasury to review, in a very short period that is already over, thousands of pages of tax regs to determine which ones are not the best reading of the code. It is not clear how this could have been done, even in a much longer period. Every regulation would have to be compared with the underlying statutory language, with considerable thought required in many cases about possible inconsistencies.

It is possible this work could be assisted by AI. Elon Musk reportedly has developed an AI tool that would comb through 100,000 pages of the Code of Federal Regulations and identify rules that are legally vulnerable under two Supreme Court decisions, presumably including Loper Bright.¹²⁶ These results would obviously require an enormous amount of review by experienced individuals.

Third, the White House memorandum has been criticized as a very aggressive use of the good cause exception to the notice and comment requirement in the APA.¹²⁷ However, it is not clear anyone could challenge this use of the exception. If this is correct, the result would not be good for the tax system.

A taxpayer benefited by the withdrawal of a regulation would have no standing to challenge the withdrawal as a violation of the APA. A taxpayer hurt by the withdrawal — that is, that benefited from the withdrawn regulation — might challenge the withdrawal as a violation of the APA. However, presumably the withdrawal would be prospective. Then, to win on the merits, the taxpayer would be claiming the ability to rely on the then-outstanding regulation, even after the government had tried to withdraw it on the basis that it violated Loper Bright and the withdrawal had failed solely for procedural reasons.

Assuming the regulation did in fact violate Loper Bright, this does not seem like a winning argument. The usual conditions for estoppel against the government do not exist, because the government has announced its position that the regulation is invalid, even though the procedure for withdrawal was defective. If this is correct, the taxpayer would lose whether or not there was an APA violation, so the taxpayer is not hurt by the APA violation and might not have standing to claim that violation.

Fourth, even aside from the APA, it is better for the tax system if taxpayers have an opportunity to comment before “hundreds” of regulations are withdrawn. Regs may have effects on taxpayers that are not apparent to Treasury. For example, a long-standing pro-taxpayer proposed consolidated return regulation was recently withdrawn without notice on the theory that it was redundant, but the withdrawal created uncertainties, so a new, similar proposed regulation had to be issued.¹²⁸

Similarly, Notice 2025-22 obsoleted Rev. Rul. 91-32, 1991-1 C.B. 107, concerning the treatment of a foreign partner of a U.S. partnership as deadwood because of a subsequent statutory change. Yet some U.S. taxpayers reportedly have continued to rely on the ruling.¹²⁹ While that information might not have caused Treasury to change its decision, it should at least have the relevant information.

The April 15 final rule allows Treasury to obtain the benefit of comments by providing a period for comments before the withdrawal of a regulation becomes effective. On the other hand, Notice 2025-22 revokes prior guidance immediately without any opportunity for comments. The former approach is better for the tax system.

2. Substance.

We now turn to what regs might be on Treasury’s list to be withdrawn. Many outstanding regulations, both pro- and anti-taxpayer, were adopted in reliance on Chevron deference and in many cases are likely not the best reading of the statute. Several of the anti-taxpayer regs potentially in this category have been discussed, and are being litigated or are likely to be litigated.

One anti-taxpayer proposal has already been withdrawn by Treasury on the basis of EO 14219. Notice 2024-54, 2024-28 IRB 24, stated an intent to issue proposed regs to prevent the shifting of basis between related parties using partnerships. The regs were intended to stop multibillion-dollar transactions between related parties that have resulted in enormous revenue losses. However, the regs would have been vulnerable under Loper Bright. Notice 2025-23 withdraws the proposal, as well as related disclosure requirements that would have identified the transactions for the IRS.

Many pro-taxpayer regulations are also highly vulnerable under Loper Bright. Many were even clearly vulnerable under Chevron.¹³⁰ Examples of these types of regs under the TCJA include:

· the GILTI high-tax election, allowing certain GILTI of a CFC subject to high foreign taxes to be excluded from GILTI reported by the U.S. parent corporation;¹³¹

· the availability of section 199A in cases in which the regulations very narrowly interpret the statutory exclusions (1) in cases in which the principal asset of the business is the reputation and skill of employees, and (2) for brokerage services;¹³²

· the allowability of expensing under prior (and possibly future) section 168(k) upon the purchase of leased property, even though the statute excludes property previously used by the taxpayer;¹³³

· the addback to the prior (and possibly future) section 163(j) earnings before interest, taxes, depreciation, and amortization limit on interest deductions for notional depreciation that is in fact capitalized into the basis of inventory;¹³⁴ and

· an exception to the base erosion and antiabuse tax for payments to foreign related-party banks on loss-absorbing capacity securities,¹³⁵ in the absence of a corresponding statutory exception.

Further, many pre-TCJA regulations and rulings that are long-established and routinely relied on by taxpayers might violate Loper Bright. These include, among many others:

· the rule in Rev. Proc. 93-27, 1993-2 C.B. 343, that a partnership interest transferred for services is valued at its liquidation value (the carried interest rule) rather than at its fair market value as is required by section 83;

· the regulation treating a qualified intermediary in a section 1031 exchange as not being an agent of the taxpayer,¹³⁶ even though the intermediary clearly is an agent and has no substance;

· the check-the-box regs,¹³⁷ particularly as they allow an actual domestic or foreign partnership to elect to be taxed as a corporation, or an actual foreign corporation to elect to be taxed as a partnership;

· the “super safe harbor” under section 355(e) automatically deeming there to be no plan for an acquisition of stock if some simple conditions are met, contrary to a statutory presumption that there is a plan;¹³⁸

· the rather arbitrary rules for determining whether there has been a realization event upon a modification of a debt instrument;¹³⁹

· the regulation treating all real estate as like-kind with all other real estate for purposes of section 1031 exchanges, no matter how different the properties are;¹⁴⁰

· the regulation saying that an organization meets the section 501(c)(3) test of being organized exclusively for charitable purposes even if its articles expressly authorize other activities that are “an insubstantial part of its activities”;¹⁴¹

· the regulation saying that a U.S. shareholder’s inclusion under section 956 (which is not a dividend) is reduced by the amount that would have been allowed as a deduction under section 245A if the inclusion had in fact been a dividend;¹⁴²

· the regulation treating the source of income from a notional principal contract as the location of the taxpayer, so a U.S. payer to a foreign payee has a U.S.-source deduction and the payee has foreign-source income exempt from withholding tax;¹⁴³

· Rev. Rul. 66-365, 1966-2 C.B. 116, saying that the “solely for voting stock” requirement for a B reorganization is satisfied even if the acquirer pays cash for fractional shares directly to the target shareholders;

· Rev. Rul. 2003-51, 2003-1 C.B. 938, saying that the control requirement of section 351 is satisfied on particular facts even though the transferer was under a binding contract to dispose of the shares of the transferee corporation; and

· Notice 2024-16, 2024-5 IRB 622, and the proposed regs on previously taxed earnings and profits, both saying that when one CFC receives a dividend from another CFC, the former CFC has an increased basis in the latter for multiple purposes, even though section 961(c) provides for that increased basis “but only” for one specific purpose.

Because of the lack of taxpayer standing to challenge pro-taxpayer regulations, only Treasury can bring balance to the system by applying Loper Bright equally to pro- and anti-taxpayer regs. This approach should be supported by those (including the Supreme Court majority in Loper Bright) who believe that administrative agencies have been usurping congressional power. After all, it is equally a usurpation if the agency is imposing either too much or too little tax compared with what Congress wrote in the statute. Perhaps this is why EO 14219, by its terms, applies equally to all regs (although it is hard to imagine that the drafters even thought about tax, let alone this issue).

In fact, it would be difficult for Treasury to eliminate only anti-taxpayer regulations. Many regs hurt some taxpayers and help others, often in unexpected ways. It would generally not be possible to carve up a regulation to retain a benefit to some taxpayers and avoid a detriment to others. Moreover, Treasury might not even know both groups exist, because it would more likely hear complaints from taxpayers hurt by a regulation than praise from taxpayers helped by it.

In any event, it may be politically difficult for Treasury to eliminate pro-taxpayer regs with the same strictness it might use in eliminating anti-taxpayer regs. If that turns out to be correct, the result will be a tax system that continues to be extremely unbalanced in favor of taxpayers.¹⁴⁴

A better result for the tax system would be if Treasury followed EO 14219 equally for all regulations, with a lead time for eliminating some or all of the older pro-taxpayer regs that taxpayers have relied on. This would force Congress to confirm legislatively, if it wished to do so, the pro-taxpayer regulations that violate Loper Bright. I hope, at the same time, it would also confirm legislatively the anti-taxpayer regs that violate Loper Bright but close unintended loopholes. No doubt this is wishful thinking, but the result would be a much more balanced tax system that is fair to both taxpayers and the fisc.

B. New Regulations

1. Procedure.

The new administration has adopted new governmentwide procedural requirements for all new regulations:

· EO 14219 requires every agency to consult with its DOGE team leads as well as with OIRA on potential new regs as soon as possible.

· EO 14192, “Unleashing Prosperty Through Deregulation,” dated January 31, requires all regulatory proposals to be approved by the director of OMB and included in a unified regulatory agenda. The director of OMB may also require additions to the agenda. The EO also reinstates the requirement from the first Trump administration that all material tax regulations be reviewed and approved by OIRA before promulgation. Finally, the EO says that “it is important that for each new regulation issued, at least 10 prior regulations be identified for elimination” (although it is unclear whether the requirement is intended to apply to regs with no revenue effect, such as interpretative tax regulations). These rules apply to all official guidance, presumably including revenue rulings and revenue procedures.

These new requirements have the potential to significantly slow down the guidance process, which is not in the interest of taxpayers or the government. If the 10-for-1 rule is intended to apply to tax regs, it is difficult to see how many new regs could be issued, unless only meaningless deadwood is eliminated. The requirements concerning OIRA also have the potential to politicize the regulatory process and give more opportunities for lobbying by taxpayers, although this was reportedly not the case for regs previously sent to OIRA.¹⁴⁵

2. Substance.

I believe there are major problems with the tax regulatory process for several additional reasons. First, taxpayers constantly discover new loopholes in the code; that is, using code provisions to achieve tax benefits in unexpected ways not originally intended by Congress. Treasury for decades has been incapable of eliminating these transactions by regulation, at least within a reasonable time, even when it had Chevron authority to try to do so. The prospects for valid regs of this type are even further reduced after Loper Bright.

Examples of this phenomenon are legion. A footnote includes some of the items that I believe could be fixed by regulations even after Loper Bright.¹⁴⁶ However, the particular items on my list, or anyone else’s list, are less important than the fact that everyone will have a list. Even regulations that have recently stopped abusive transactions have taken a very long time to be adopted.¹⁴⁷ It is not good for the tax system that Treasury cannot correct these problems in a reasonable time.

Second, the lack of standing by taxpayers to challenge pro-taxpayer regulations means that Treasury is the only party with the ability and responsibility to fairly administer the tax laws under Loper Bright and without pro-taxpayer bias. Still, the lack of standing also means that Treasury also has the unrestricted power to issue pro-taxpayer regulations inconsistent with Loper Bright. (In fact, under another recent EO, the final authorities on all legal interpretations of law are the president and attorney general.¹⁴⁸) I do not believe that the exclusive reliance on Treasury to prevent unjustifiable pro-taxpayer actions is good for the tax system.

This power of Treasury to adopt pro-taxpayer regulations is not limited to fixing errors in the statute or preventing abusive transactions. In some cases, justifiable or not, it has been used to improve the administrability of the tax law, such as the check-the-box regs and regulations allowing qualified intermediaries under section 1031.

More recently, the American Rescue Plan Act amended section 6050W(e) to reduce from $20,000 to $600 the threshold for Form 1099-K, “Payment Card and Third Party Network Transactions,” reporting to individuals by third-party settlement organizations (for example, Venmo), effective for calendar year 2022. Treasury has delayed this reporting obligation several times. Most recently, Notice 2024-85, 2024-51 IRB 1349, provides for a threshold of $5,000 for 2024, $2,500 for 2025, and $600 thereafter. There is no statutory basis for the deferral, or for the arbitrary intermediate thresholds, but no one has standing to object.

Arguably these pro-taxpayer rules that relate to tax administration are justifiable as a policy matter, despite their inconsistency with the code and the fact that comparable anti-taxpayer rules would be invalidated by the courts. However, I think that other, more extreme, cases could seriously undermine the integrity of the tax system and the role of Congress as lawmaker. For example, Treasury overrode specific rules in section 382 in order to preserve the value of enormous amounts of bank tax losses during the 2008 financial crisis.¹⁴⁹

As to the future, surely Treasury could not write a regulation providing for a tax rate that is lower than the statutory rate, or allowing interest deductions without regard to section 163(j), or allowing tax benefits in full without regard to a phaseout under a reconciliation bill.

But suppose Treasury issues a regulation to allow indexing of tax basis for inflation. The validity of that regulation has been discussed at least since 1992. Treasury and the Department of Justice under President George H.W. Bush concluded that such a regulation would be invalid. However, some argued for this approach in 2017-2018 during the first Trump administration.¹⁵⁰

I believe that this regulation would clearly be invalid under Chevron step 1 and that Loper Bright would completely eliminate any argument for validity. However, just as Treasury did with Form 1099-K reporting, section 382, or the check-the-box regs, Treasury could issue this regulation under whatever theory it might have. Taxpayers could then follow the regulation without regard to its validity. I think this would be a terrible result for the tax system.

Of course, the standing requirement is not a complete bar to a challenge to the validity of all pro-taxpayer regs. Many regulations help some taxpayers and hurt others. A court could invalidate a regulation in a case brought by a taxpayer in the latter category. However, even in that case, short of a Supreme Court decision invalidating a regulation, Treasury or the IRS could non-acquiesce in the decision and still allow taxpayers to continue to follow the regulation if they wanted to. Taxpayers would then, in effect, have an election on whether to follow it. This would be even more favorable for taxpayers (and worse for the tax system) than the situation in which a court invalidates a regulation and Treasury remains silent.

C. Tax Enforcement

There are two important aspects to tax enforcement: enforcement policies and the ability to enforce the tax laws.

1. Enforcement policy.

Similar to Treasury’s unrestricted power to issue pro-taxpayer regulations without challenge, the same power exists for pro-taxpayer administrative enforcement of the code and regs. Treasury and the IRS theoretically have the unrestricted power to administratively fail to enforce anti-taxpayer provisions of the code, or to provide other pro-taxpayer benefits not authorized by it. The Supreme Court has held that an agency decision not to enforce a violation of the underlying statute is presumptively unreviewable as a claimed violation of the APA, even by a taxpayer with clear standing.¹⁵¹

There are practical limitations on this power, just as there are on the regulation-writing power. Surely Treasury could not issue a revenue procedure saying that it would accept tax returns filed with payment of tax at a rate lower than the statutory rate, or with interest deductions taken without regard to section 163(j), or with tax benefits claimed without regard to a statutory phaseout. On the other hand, less extreme fact patterns are possible. Treasury could withdraw Rev. Rul. 2024-14 concerning the ESD, announce that it would apply antiabuse rules such as the ESD very narrowly on audit, disavow past pro-government judicial victories in lower courts such as on the ESD or section 1402(a)(13), fail to appeal and acquiesce in judicial losses even when an appeal would have substantial merit, or finalize existing outstanding proposed regulations in a pro-taxpayer manner that would be inconsistent with Loper Bright. These actions would be bad for the tax system.

In that regard, EO 14219 directs agencies, after proper consultation and on a case-by-case basis and consistent with applicable law, to terminate enforcement proceedings “that do not comply with the Constitution, laws, or Administration policy.” While the reference to administration policy is not entirely clear, the requirement to act consistent with applicable law could be interpreted to require continued enforcement of clear statutory or regulatory requirements unless there is a good claim of unconstitutionality. On the other hand, in the nontax area, the administration has stopped or slowed enforcement of laws and regulations that it considers to be inconsistent with administration policy.¹⁵²

An application of EO 14219 that gave priority to administration tax policy over the Loper Bright interpretation of tax law and regulations would raise the same issues discussed above in connection with the issuance of regulations. I believe that such an application, which could only be pro-taxpayer because of judicial limitations on anti-taxpayer rules, would not be good for the tax system. Likewise, even the appearance of selective enforcement or nonenforcement of the code for or against particular taxpayers for political reasons is obviously very bad for the tax system.¹⁵³

2. Ability to enforce the tax law.

Before the Inflation Reduction Act, over the years there was a significant decrease in the IRS’s enforcement workforce, the number of auditors of sophisticated tax returns, and the audit rate of high-income taxpayers.¹⁵⁴ The IRA authorized the IRS to spend $80 billion of extra funding over time, the majority on enforcement. The Congressional Budget Office estimated that this funding would have led to a revenue increase (net of the additional spending) of $180 billion over 10 years, although estimates vary widely, and the Budget Lab at Yale recently estimated $637 billion over 10 years.¹⁵⁵

Then-Secretary Yellen directed the IRS to focus the additional enforcement resources on high-end noncompliance, in particular on large corporations, high-net-worth individuals, and complex passthroughs. She pointed out that the IRS could now audit only 7,500 of these taxpayers annually out of 4 million returns received, and that each hour spent on auditing someone making more than $5 million annually generates an average of $4,500 in additional taxes.¹⁵⁶

The IRS then actively began hiring new examiners. However, Congress has since eliminated most of the $80 billion of extra funding, and almost nothing is left of those funds for enforcement.¹⁵⁷ Concerning the future, the administration’s proposed budget for fiscal 2026 would cut the IRS’s funding by 20 percent (26 percent for all functions except taxpayer services). This would leave the funding at about the level for 2002, despite 70 percent inflation since then.¹⁵⁸

Consequently, thousands of IRS examiners have recently been fired, and few if any will be hired in the future. This leaves the IRS with a severely reduced number of experienced examiners and the apparent inability to hire more.

While the numbers are regularly updated, the administration’s goal reportedly has been to eliminate over 18,000 IRS employees (out of 100,000) by May 15, including 8,260 in enforcement.¹⁵⁹ The layoffs would include 15 percent of the IRS Office of Chief Counsel and 27 percent of the independent IRS Office of Appeals.¹⁶⁰ Layoffs would include mass dismissals of employees who audit the largest corporations and bring in the highest return on investment.¹⁶¹ More recent projections are that about one-third of the workforce would leave this year.¹⁶² Not surprisingly, morale is low in the Large Business and International Division, which audits the largest taxpayers.¹⁶³

In particular, the Passthrough Entities office, which audits complex partnerships, is reported to have lost 27 percent of its workforce this year. The Global High Wealth office, which has the most experienced agents and audits the wealthiest taxpayers, has lost 38 percent of its employees this year (353 down to 220), and current agents report their teams “as being in a state of near paralysis.”¹⁶⁴

Consequently, the IRS reportedly has dropped investigations of high-net-worth corporations and individuals because of a lack of resources.¹⁶⁵ There are also reports of audit delays and audits being dropped midway without further investigation because of the lack of auditors,¹⁶⁶ and money being “left on the table” in large complex cases by departing agents trying to close cases by “agreeing to things that the IRS would never have agreed to before.”¹⁶⁷ One agent reports that “these cases are going to be closed and we’re going to look like idiots. . . . There is no one left to work them. The remaining agents have full caseloads.”¹⁶⁸

Regarding the future, reduced audit levels on high-income taxpayers are likely to encourage aggressive tax positions that taxpayers will not expect to be challenged. One practitioner recently suggested that “undoubtedly there’ll be another cycle of abusive tax shelters that use partnerships.”¹⁶⁹

At lower income levels, the IRS is reported to have noticed “an uptick in online chatter” from individuals saying they won’t pay taxes this year or will claim improper credits or deductions, hoping not to be audited.¹⁷⁰ Other reports indicate that, because of the perception that there will be a reduced risk of audit, many individuals are less concerned about making mistakes on their tax returns or are considering not filing tax returns this year.¹⁷¹

Of course, reports of some taxpayers not paying their taxes cause other taxpayers to take a chance and not pay. Partly as a result of these factors, Treasury and IRS officials predicted the possibility of more than a 10 percent drop in tax receipts ($500 billion) by April 15 of this year compared with last year.¹⁷² The Budget Lab at Yale estimates that a reduction in the IRS workforce of 18,000 (18 percent) would have a revenue cost over 10 years (net of the cost savings from the reduction) of at least $159 billion and possibly as much as $1.6 trillion, depending on the amount of increased noncompliance.¹⁷³ Former Treasury Secretary Larry Summers recently predicted a likely loss of more than $1 trillion.¹⁷⁴

In reality, reduced enforcement is likely to benefit higher-income taxpayers more than lower-income taxpayers. Lower-income taxpayers are more likely to have their income subject to tax reporting and to claim the standard deduction, making it much harder to omit income or benefit from made-up deductions. Further, the cutback in auditors is likely to result in more correspondence audits and fewer field audits. Correspondence audits are cheaper and mostly affect low-income taxpayers claiming the earned income tax credit and child tax credit, while field audits take more time and mostly affect high-income taxpayers.¹⁷⁵

A recent agreement between Treasury and the Department of Homeland Security requires the IRS to provide DHS with tax return data for undocumented immigrants under criminal investigation.¹⁷⁶ In 2023, undocumented immigrants are reported to have paid federal taxes of about $66 billion, two-thirds of which is payroll taxes (including employer FICA) for Social Security and Medicare benefits that they are not entitled to receive.¹⁷⁷ The agreement with DHS may make those individuals fearful of filing tax returns and could result in a significant revenue loss to the federal government.

One estimate of the resulting revenue loss, including from increased self-employment and “under the table” employment arrangements, is $12 billion to $39 billion in 2026 and $147 billion to $479 billion in 2026-2035.¹⁷⁸ In fact, tax return preparers in immigrant communities report that the number of their tax return filings by April 15 was, in many cases, much lower than last year, including by legal immigrants who did not want to call attention to undocumented relatives.¹⁷⁹

The revenue loss has been defended on the ground that it is a legitimate policy decision by the administration to have stricter immigration enforcement despite the expected revenue loss. However, it has also been noted that there is a broader societal cost of discouraging compliance with the tax laws and undermining the civic engagement of immigrants with the federal tax system.¹⁸⁰ In any event, the result is bad for the tax system notwithstanding any nontax justifications.

EO 14173, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity,” dated January 31, 2025, requires all agencies to terminate all programs or activities concerning diversity, equity, inclusion, and accessibility. This is likely to require the IRS to end or substantially curtail its attempts to reduce racial bias in audits.¹⁸¹

Regarding criminal matters, DHS has asked Treasury to deputize some IRS criminal investigators to work on immigration enforcement.¹⁸² Concerning the Justice Department, its Tax Division has not had a congressionally confirmed assistant attorney general since 2009 except for a two-year period. There have been only acting appointments, making it hard to manage the department.¹⁸³

Moreover, the Justice Department has asked for comments on a proposal to eliminate the Tax Division and reassign its attorneys to local U.S. attorney offices. This has been strongly criticized by many experienced tax controversy attorneys as bad for the tax system because of the resulting loss of centralized tax enforcement policies.¹⁸⁴

The IRS is now on its fourth acting commissioner since the start of the Trump administration. The nominee for permanent commissioner twice cosponsored bills in the House to eliminate all funding for the IRS, and replace the income, employment, and estate taxes with a national sales tax (at a 30 percent tax-exclusive rate) that would be primarily administered by the states.¹⁸⁵

Roughly half of the IRS’s top leaders have recently left.¹⁸⁶ The Taxpayer Advocate Service is losing up to 25 percent of its workforce, increasing the burden on the remaining employees that already work 150 to 200 cases each.¹⁸⁷ The entire staff of the Taxpayer Experience Office, which was created to improve the taxpayer experience when dealing with the IRS, is reportedly being laid off.¹⁸⁸

It is hard to imagine a worse set of affairs for the fair and effective collection of taxes from taxpayers at all income levels. This is yet another big negative for the state of the tax system.

D. Consultation With Taxpayer Groups

Treasury and IRS officials have long said they benefit from contact with taxpayer groups, including meetings at tax conferences or in periodic private sessions, and reviewing reports from bar associations and other public interest groups. The opportunity to interact and exchange ideas is beneficial to both the taxpayer community and government officials.

For a time after the change in administration, Treasury and IRS officials were not participating in panels or, at least in some cases, scheduling meetings with taxpayer groups.¹⁸⁹ Also, the Justice Department adopted a policy preventing any of its employees from attending or participating in American Bar Association events in their official capacities or on official time, or using government internet access or research databases in preparing anything to be published by the ABA.¹⁹⁰

However, it now appears that these Treasury and IRS restrictions were temporary, since both agencies are again participating in bar association and similar activities. This is good for the tax system because that interaction clearly makes for better tax regulations and a better tax system.

V. Conclusion

For all the stated reasons, I believe the state of the tax system is poor. But the Constitution requires a State of the Union address to include recommendations that are necessary and expedient.

Unfortunately, most or all of the negative elements of the current tax system will likely continue. Congressional gridlock will persist, tax legislation will have technical errors, Treasury will continue to have the power to fix (at most) only anti-taxpayer errors, no one will have standing to challenge pro-taxpayer regulations, and courts will give only limited deference to Treasury regulations.

As a result, litigation will proliferate concerning anti-taxpayer regulations, uncertainty about the tax law will increase, and the law may be different in different parts of the country. The tax system will remain inherently unbalanced in favor of taxpayers, and the ultimate responsibility and power to create as much balance as possible will remain with Treasury, acting within its statutory and constitutional limits.

To relieve some of the initial uncertainties resulting from Loper Bright, perhaps Congress could pass legislation saying that all existing Treasury regulations will be considered valid from their date of publication. It could make specific exceptions and provide any desired rule in lieu of those regulations. There would be no constitutional problem with this because there is no delegation of authority but rather a ratification of specific past actions of Treasury.

The result would be a much more balanced system and would avoid a large amount of litigation likely to arise under Loper Bright. Taxpayers would dislike this approach to the extent that they would prefer that anti-taxpayer regulations be withdrawn or overturned in court, rather than ratified. Taxpayers would like this approach to the extent that they prefer having pro-taxpayer regulations ratified rather than possibly be withdrawn by Treasury or disregarded by a court.

In addition, Treasury could take the position that unless Congress acts to ratify past regulations, it will ruthlessly withdraw on a prospective basis any regulations that it believes do not conform to Loper Bright, regardless of whether they are pro- or anti-taxpayer. Likewise, it could announce that all future regulations would be strictly based on Loper Bright and that any complaints by taxpayers should go to Congress rather than to Treasury. This would be fully consistent with EO 14219 and the rationale of Loper Bright. The burden would then be on Congress to amend the code in any way that it desired to codify any existing regulation so withdrawn by Treasury, to make future technical corrections, and to fill any unintended gaps in the current or future statute.

Congress could also take more modest steps to facilitate the operation of the tax system. It could amend the APA to relieve some of the pressure on Treasury to write expansive preambles for every regulation, to make it easier for Treasury to adopt temporary regs as contemplated by section 7805(b), and to reverse the result in Corner Post (a 6-3 decision) by having the statute of limitations on all challenges to the validity of a tax regulation begin when the regulation is adopted rather than when the taxpayer is injured by it. Congress could clarify that the ESD is relevant whenever the tax result of a transaction is inconsistent with congressional intent. It could increase funding for the IRS to allow fair enforcement of the tax laws at all income levels.

As to delegations, Congress could enact the Chevron standard into law, at least for tax regulations, because Loper Bright was an APA case rather than a constitutional case. On the other hand, even Chevron deference might now be subject to challenge as an unconstitutional delegation. In any event, at a minimum, all new tax laws should have delegations that are tailored to any new standard for constitutional delegations, and existing delegations in the code could be modified accordingly. It is good for the tax system that H.R. 1 as passed by the House provides for more specific tax delegations.

Finally, to deal with circuit splits on tax issues, Congress could create a national court of tax appeals, just under the Supreme Court, to take appeals when there is a conflict among circuits.

Aside from more specific tax delegations, do I think any of this is likely to happen, or even reasonably possible? Of course not.

But now the good news: The tax system is just about money. Its problems are fixable, except maybe the lack of taxpayer standing. Congress still has the power to raise taxes, close loopholes, adopt antiabuse rules, and increase the funding of the IRS. If revenue collections are inadequate, Congress will be forced to do so to prevent unsustainable debt loads. Taxpayers subject to withholding or that receive information returns will not have much choice but to pay. The others can be encouraged to pay by increased enforcement and penalties, possibly using AI. And Treasury has the power to administer the tax system in a balanced way that is fair to all taxpayers and the fisc.

By contrast, the adverse consequences of environmental degradation, global warming, inadequate medical care, inadequate early childhood education, and the like are not so easily reversed. In my true State of the Union address, I might not even have time to discuss the state of the tax system.

FOOTNOTES

¹ U.S. Constitution, Article II, section 3, provides that the president “shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient.”

² See, e.g., Jasper L. Cummings, Jr., “Literalism vs. the Economic Substance Doctrine,” Tax Notes Federal, Mar. 17, 2025, p. 2023 (“Eventually, the enforcement of the income tax could become so fraught that even Democrats will agree it should be replaced or at least supplemented with a VAT.”). For a more positive view, see Tracey M. Roberts, “The Tax Trench Deepens,” 28(2) Fla. Tax. Rev. (forthcoming 2025; also available on SSRN) (concluding that “to the extent that the Court continues to observe the separation of powers in respect of their relationship with the legislature and legislative prerogatives, the tax system is likely to remain resilient”).

³ Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).

⁴ See, e.g., Zach C. Cohen and Chris Cioffi, “Tax Writers in Congress See Fundraising Boost as Tax Cliff Looms,” Bloomberg Tax, Apr. 18, 2025.

⁵ Asha Glover, “$5.5 Trillion Cost to Making TCJA Permanent, JCT Says,” Law360 Tax Authority, Apr. 3, 2025.

⁶ Martin A. Sullivan, “Jettison the Current-Policy Baseline,” Tax Notes Federal, Mar. 17, 2025, p. 1955.

⁷ Committee for a Responsible Federal Budget, “Policymakers May Double Down on Baseline Manipulation” (Apr. 23, 2025).

⁸ Marc J. Gerson, “Technically Speaking: The Art of Tax Technical Corrections,” Tax Notes, Mar. 5, 2007, p. 927. A panelist on a recent webinar said that it was at least questionable whether technical corrections could be included. Committee for a Responsible Federal Budget webinar, “Reconciliation 101: The Budget Resolution & What Comes Next” (Feb. 25, 2025).

⁹ See Maureen Leddy, “One Tax Reform Hurdle to Watch,” Thomson Reuters Checkpoint, Apr. 9, 2025.

¹⁰ Jonathan Curry, “House Adds Head-Scratching Tweaks to International Tax Regime,” Tax Notes Federal, May 26, 2025, p. 1535.

¹¹ Congressional Budget Office, “CBO Explains Budgetary Scorekeeping Guidelines” (Jan. 2021) (see Guideline 3, excluding anticipated indirect changes to revenue from changes in discretionary funding of an agency); CBO, “Summary of Estimated Budgetary Effects of Public Law 117-169,” at 4, para. (c) (Sept. 7, 2022) (disregarding increased tax collections from increased funding of IRS).

¹² Of course, good is in the eye of the beholder.

¹³ JCT, “Explanation of Technical Corrections to the Tax Reform Act of 1984 and Other Recent Tax Legislation,” JCS-11-87 (May 13, 1987).

¹⁴ JCT, “Description of the Tax Technical Corrections Act of 2007,” JCX-109-07 (Nov. 16, 2007).

¹⁵ JCT, “General Explanation of Public Law 115-97,” JCS-1-18 (Dec. 20, 2018).

¹⁶ See Brady, “Tax Technical and Clerical Corrections Act Discussion Draft” (Jan. 2, 2019). The proposal is described in JCT, “Technical Explanation of the House Ways and Means Committee Chairman’s Discussion Draft of the ‘Tax Technical and Clerical Corrections Act,’” JCX-1-19 (2019).

¹⁷ JCT, “General Explanation of Tax Legislation Enacted in the 117th Congress,” JCS-1-23 (2023).

¹⁸ As an example, section 1061(c)(4)(A) excludes partnership interests held by a corporation from the adverse rules of section 1061. The exclusion literally applies to partnership interests held by an S corporation even though that was clearly not the intent. Reg. section 1.1061-3(b)(2)(i) would take S corporations out of the exception to section 1061, but the validity of that regulation is not clear, especially after Loper Bright. The literal interpretation would make it trivially easy to avoid section 1061 in many cases by using an S corporation.

¹⁹ Examples include: (1) step-up in basis on death, or failure to tax unrealized gains at death; (2) section 199A; (3) Opportunity Zones; (4) carried interest; (5) exemption of credit unions and cruise lines from income tax; (6) overallocation of interest expense from multinational groups to the United States, and other techniques by those groups to shift income offshore; and (7) allowance of both interest deductions and expensing to create a negative effective income tax rate on leveraged business assets.

²⁰ 5 U.S.C. sections 801(b)(2) and 802(a).

²¹ H.J. Res. 25, signed by President Trump April 10, 2025, disapproving regulations issued under T.D. 10021.

²² Tyrah Burris, “Repeal of Crypto Reporting Rule Sent to Trump,” Tax Notes Federal, Mar. 31, 2025, p. 2490.

²³ H.R. 1, section 70200(c). See Andres Picon, “GOP May Be Closer Than Ever to Enacting a Massive Rule-Busting Bill,” Politico, May 5, 2025; Hailey Fuchs and Mia McCarthy, “It Was Supposed to Be a Tax and Border Bill. It Could Also Hand Trump Vast New Executive Powers,” Politico, Apr. 29, 2025.

²⁴ Amelia Davidson, “Why House Republicans Stripped a Regulatory Overhaul From Their Megabill — For Now,” Politico, May 22, 2025.

²⁵ Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

²⁶ Gitlitz v. Commissioner, 531 U.S. 206 (2001). The result was later reversed by legislation.

²⁷ Wisconsin Central Ltd. v. United States, 585 U.S. 274 (2018).

²⁸ Summa Holdings Inc. v. Commissioner, 848 F.3d 779 (6th Cir. 2017).

²⁹ The “purpose [of the statute] must be grounded in text. It cannot save the statute from itself. . . . The Commissioner cannot fault taxpayers for making the most of the tax-minimizing opportunities Congress created.” The results “may be an unintended consequence of Congress’s legislative actions, but it is a text-driven consequence no less.” If Congress sees the result in the case “as an improper loophole, it should fix the problem. . . . The last thing the federal courts should be doing is rewarding Congress’s creation of an intricate and complicated Internal Revenue Code by closing gaps in taxation whenever that complexity creates them.” Id.

³⁰ Benenson v. Commissioner, 887 F.3d 511 (1st Cir. 2018). The Second Circuit then reached the same result in Benenson Jr. v. Commissioner, 910 F.3d 690 (2d Cir. 2018).

³¹ Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001).

³² Congress later reversed this holding by adding the current last sentence of section 1502, allowing regulations that differ from the normal code provisions.

³³ Corner Post Inc. v. Board of Governors of the Federal Reserve System, 603 U.S. 799 (2024). See also Saul Mezei and Jonathan C. Bond, “Hitching Your Tax Wagon to Corner Post,” Tax Notes Federal, Mar. 24, 2025, p. 2201.

³⁴ Skidmore v. Swift & Co., 323 U.S. 134 (1944).

³⁵ Bondi v. Vanderstok, 145 S. Ct. 857 at 874 (2025).

³⁶ National Muffler Dealers Association Inc. v. United States, 440 U.S. 472 (1979).

³⁷ Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011).

³⁸ Lissack v. Commissioner, 125 F.4th 245 (D.C. Cir. 2025). The Supreme Court granted certiorari on the original decision and then remanded for reconsideration in light of Loper Bright.

³⁹ Amish M. Shah et al., “Lissack II and Future Energy Tax Controversy — Is Chevron Really Dead?” Tax Notes Federal, Apr. 7, 2025, p. 91.

⁴⁰ See New York State Bar Association Tax Section, “Legislative Grants of Regulatory Authority,” Report No. 1121 (Nov. 3, 2006). For a 50-page list of delegations, see Donald B. Susswein, Eric Brauer, and Austin Blackburn, “A List of Vague Regulatory Delegations,” Tax Notes Federal, Nov. 11, 2024, p. 1143.

⁴¹ See, e.g., NYSBA Tax Section, “Comment on Tax Implications of Loper Bright,” Report No. 1508 (Mar. 7, 2025); Kristin E. Hickman, “Anticipating a New Modern Skidmore Standard,” 74 Duke L.J. 111 (Mar. 2025); Hickman and Amy J. Wildermuth, “Harmonizing Delegation and Deference After Loper Bright,” N.Y.U. L. Rev. (forthcoming 2025; also available on SSRN); Andrew Velarde and Kiarra M. Strocko, “IRS Asserts General Reg Authority Is ‘Robust Delegation,’” Tax Notes Federal, Dec. 23, 2024, p. 2454.

⁴² Bob Jones University v. United States, 461 U.S. 574 (1983), relying in part on Rev. Rul. 71-447, 1971-2 C.B. 230.

⁴³ See Mitchell M. Gans, “Has the Supreme Court Already Resolved How Loper Bright Applies to Section 7805 Regulations?” Tax Notes Federal, May 12, 2025, p. 1069.

⁴⁴ See Michael Rapoport, “GOP’s Tax Package Grapples With Impact of Loper Bright Ruling,” Bloomberg Tax, May 16, 2025.

⁴⁵ See, e.g., Hamel v. Commissioner, T.C. Memo. 2025-19 (a regulation involving partnership reporting, previously upheld under Chevron, was also valid under Loper Bright because, although the statute is unclear, after giving due deference to Treasury, the regulation adopts the best interpretation); Express Scripts Inc. v. United States, No. 4:21-cv-00737 (E.D. Mo. Mar. 18, 2025) (upholding a regulation under section 199, saying, “Legislative delegation of authority within reasonable bounds is permitted [under Loper Bright] and is sometimes the best reading of statutory language.”); Rockwater Inc. v. United States, 121 F.4th 1287 (11th Cir. 2024) (citing section 7805(a) as authority for a regulation, although in a case in which the validity of the regulation was not challenged and Loper Bright was not mentioned); Facebook Inc. v. Commissioner, 164 T.C. No. 9 (2025), upholding a section 482 regulation on cost sharing arrangements.

⁴⁶ See also Reuven S. Avi-Yonah, “The Triumph of Tax Textualism,” Tax Notes Federal, Oct. 14, 2024, p. 291, quoting Justice Elena Kagan’s statement that “We are all textualists now.” Compare West Virginia v. EPA, 597 U.S. 697 (2022), J. Kagan, dissenting (“Some years ago I remarked that ‘we’re all textualists now.’ It seems I was wrong. The current Court is textualist only when being so suits it. When that method would frustrate broader goals, special canons like the ‘major question doctrine’ magically appear as get-out-of-text-free cards.”).

⁴⁷ Varian Medical Systems Inc. v. Commissioner, 163 T.C. No. 4 (2024).

⁴⁸ Id. at n.22.

⁴⁹ Rapoport, “Cisco, Booking Get Big Tax Benefits From Varian Court Ruling,” Bloomberg Tax, Dec. 2, 2024.

⁵⁰ FedEx Corp. v. United States, No. 2:20-cv-02794 (W.D. Tenn. Feb. 13, 2025).

⁵¹ 3M Co. v. Commissioner, 160 T.C. 50 (2023).

⁵² The Tax Court relied on the holding in 3M to uphold the same regulation in The Coca-Cola Co. v. Commissioner, T.C. Memo. 2023-135, which is on appeal to the Eleventh Circuit.

⁵³ See Petition, Abbott Laboratories v. Commissioner, No. 15235-24 (T.C. Sept. 19, 2024).

⁵⁴ See Alexander F. Peter, “Altera Redux: McKesson Files Cost-Sharing Agreement Refund Suit,” Tax Notes Federal, May 12, 2025, p. 1119.

⁵⁵ Altera Corp. v. Commissioner, 926 F.3d 1061 (9th Cir. 2019), reh’g denied with dissent, 941 F.3d 1200 (9th Cir. 2019), cert. denied, No. 19-1009 (U.S. June 22, 2020).

⁵⁶ Altera’s loss reportedly triggered a $1.1 billion book expense for Meta Platforms Inc. and $418 million for Alphabet Inc. Caleb Harshberger, “McKesson’s Transfer Pricing Suit Seeks to Bring Back Tax Breaks,” Bloomberg Tax, May 9, 2025.

⁵⁷ Reg. section 1.701-2(a) through -2(d). Reg. section 1.701-2(e), concerning the treatment of partnerships as entities or aggregates, should not be subject to challenge because it is based on the legislative history of the 1954 code and is not contrary to any explicit code provision.

⁵⁸ Otay Project LP v. Commissioner, Docket No. 6819-20 (T.C.); Tribune Media Co. v. Commissioner, No. 23-1135 (7th Cir.).

⁵⁹ Letter from Norah E. Bringer, attorney for the commissioner, to Christopher G. Conway, clerk of the court, in Tribune Media, No. 23-1135 (July 10, 2024).

⁶⁰ Schwarz v. Commissioner, T.C. Memo. 2024-55.

⁶¹ For the issues on which the Tax Court judge asked for briefing, see Cummings, supra note 2, at 2036-2037.

⁶² Reg. section 1.245A-5(c).

⁶³ Order on Plaintiff’s Motion for Summary Judgment, Liberty Global Inc. v. United States, No. 1:20-cv-03501 (D. Colo. Apr. 4, 2022).

⁶⁴ Order on Cross-Motions for Summary Judgment, Liberty Global, No. 1:20-cv-03501 (D. Colo. Oct. 31, 2023).

⁶⁵ Section 7701(o).

⁶⁶ Reg. section 1.245A-5(e).

⁶⁷ Reg. section 1.1503(d)-1(d).

⁶⁸ Prop. reg. section 58.4501-7(e).

⁶⁹ Reg. section 1.1061-3(b)(2)(i).

⁷⁰ Notice 2023-80, 2023-52 IRB 1583, section 5.04.

⁷¹ Compare section 956(d) with reg. section 1.956-2(b)(2).

⁷² Reg. section 1.385-3(b)(2), (3).

⁷³ Doron Narotzki, “Chevron Unraveled, Tax Law Unleashed,” 86 Ohio St. L.J. Online (forthcoming 2025; also available on SSRN). The article lists, among other things, regulations or rulings (1) imposing taxes on various cryptocurrency transactions such as the treatment of hard forks, (2) limiting types of expenses for which energy tax credits can be claimed, (3) limiting the definition of qualified research for tax credit and section 174 purposes, (4) limiting the deduction of expenses for regulatory compliance, (5) requiring capitalization of expenses of telecommunications companies, and (6) disallowing the deduction of certain cannabis-related expenses.

⁷⁴ See Shah et al., supra note 39.

⁷⁵ Ken Brewer, “Perfect Storm Threatens Long-Awaited Branch Currency Regulations,” Tax Notes Federal, Apr. 21, 2025, p. 521.

⁷⁶ Justin L. Campolieta and Michael S. Coravos, “Does Loper Bright Provide a Reason to Rethink Reasonable Cause?” Tax Notes Federal, May 26, 2025, p. 1439.

⁷⁷ Bob Jones University, 461 U.S. 574. Section 501(c)(3) grants exemption for institutions organized and operated exclusively for charitable or educational purposes. The Court relied in part on Rev. Rul. 71-447, stating that a racially discriminatory private school is not eligible for exemption because racial discrimination violates federal public policy.

⁷⁸ Justice William Rehnquist, in language not so different from the court in Varian, dissented on the ground that only Congress could add this public policy condition to the statute.

⁷⁹ Editorial Board, “Should Harvard Be Tax Exempt?” The Wall Street Journal, Apr. 23, 2025.

⁸⁰ Kristen A. Parillo, “Basis-Shifting Guidance Repeal May Force IRS to Adjust Strategy,” Tax Notes Federal, May 12, 2025, p. 1106.

⁸¹ Several commentators agree. See Cummings, supra note 2, at 2036 (“Recall that the premise of this article is that the Supreme Court’s literalism, as illustrated by the Loper Bright opinion, will lead to the demise of the ESD.”). He continues: “The Supreme Court’s literalism and disdain for regulations will bring an entirely new day to the federal tax law” and “the fate of the ESD will be just a sideshow to the larger tax concerns of the United States in the coming years.” Id. at 2037. See also Nathaniel S. Pollock, Stephen M. Judge, and Tiernan B. Kane, “Trumping the Economic Substance Doctrine With Varian,” Tax Notes Federal, Apr. 28, 2025, p. 693, arguing that reliance on congressional intent under the ESD is inconsistent with the literalism approach of Loper Bright and Varian.

⁸² Order on Cross-Motions for Summary Judgment, Liberty Global, No. 1:20-cv-03501.

⁸³ Otay Project, Docket No. 6819-20.

⁸⁴ See Answering Brief for Petitioner at 220, Otay Project, No. 6819-20 (T.C. Apr. 11, 2025); see also Parillo, “Tax Advisers’ Opinions Highlighted in Otay Briefs,” Tax Notes Federal, Feb. 10, 2025, p. 1165.

⁸⁵ Patel v. Commissioner, Docket No. 24344-17 (T.C.); see Kat Lucero, “Tax Court’s Economic Substance Foray May Clarify Limits,” Law360 Tax Authority, Aug. 7, 2024.

⁸⁶ Petition, Farmers and Merchant Bancshares Inc. v. Commissioner, Docket No. 3394-25 (T.C. Mar. 13, 2025), described in Lucero, “Md. Bank Disputes IRS Denial of Captive Tax Perk,” Law360 Tax Authority, Mar. 25, 2025.

⁸⁷ Memorial Hermann Accountable Care Organization v. Commissioner, 120 F.4th 215 (5th Cir. 2024).

⁸⁸ See, e.g., Rauenhorst v. Commissioner, 119 T.C. 157 (2002).

⁸⁹ Loper Bright, 603 U.S. at 375.

⁹⁰ Id. at 371.

⁹¹ Id. at 404.

⁹² Id. at 413.

⁹³ J.W. Hampton Jr. and Co. v. United States, 276 U.S. 394, 409 (1928) (“If Congress shall lay down by legislative act an intelligible principle to which the person or body authorized [] is directed to conform, such legislative action is not a forbidden delegation of legislative power.”).

⁹⁴ Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935).

⁹⁵ Ellsworth C. Alvord, “Treasury Regulations and the Wilshire Oil Case,” 40 Colum. L. Rev. 252, 260 (1940).

⁹⁶ Foster v. Commissioner, 80 T.C. 34, 141 (1983). A decision on appeal did not affect this holding.

⁹⁷ Airlines for America v. Department of Transportation, No. 24-60231 (5th Cir. Jan. 28, 2025), upheld the constitutionality of a nontax delegation to issue regulations that the agency considered necessary to carry out the “purposes of this part.” 49 U.S.C. section 40113(a). While this language is similar to that in section 7805(a), the basis for the decision was that the underlying statutory provision itself gave discretion that was specific enough to satisfy the test. As a result, this case is not significant support for the constitutionality of section 7805(a).

⁹⁸ General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935).

⁹⁹ For example, reg. section 1.1275-4(b)(6) treats all gain on the sale of a contingent payment debt instrument as ordinary interest income, regardless of the reason for the gain, and any loss exceeding prior interest income as capital loss. Likewise, reg. section 1.1275-2(k) allows a qualified reopening of an issue of debt instruments to achieve fungibility of the new debt with the old debt, even if there was no plan to issue the new debt at the time the old debt was issued.

¹⁰⁰ See Thomas D. Bettge, Mark R. Martin, and Hans Gerling, “Does Transfer Pricing Have a Loper Bright Problem?” Tax Notes Federal, Mar. 31, 2025, p. 2383.

¹⁰¹ FCC v. Consumers’ Research, 109 F.4th 743 (2024), cert. granted, No. 24-354 (U.S. Nov. 22, 2024).

¹⁰² For a discussion of the case, see Katie Buehler, “Supreme Court Eyes Its ‘Next Frontier’ in FCC Delegation Case,” Law360, Jan. 31, 2025.

¹⁰³ 47 U.S.C. section 254(b)(7).

¹⁰⁴ Reply Brief for the federal petitioners at 3-4, FCC v. Consumers’ Research, No. 24-354 (U.S. Mar. 13, 2025).

¹⁰⁵ Id. at 4-5 (citing Skinner v. Mid-America Pipeline Co., 490 U.S. 212, 220 (1989)).

¹⁰⁶ Id. at 19.

¹⁰⁷ See, e.g., Katie Wellington and Danielle Desaulniers Stempel, “Chevron Is Dead. The Supreme Court May Revive Non-Delegation Next,” Bloomberg Law, Mar. 27, 2025. See also Christopher P. Bowers and Garrett L. Brodeur, “‘The Buck Stops With Congress’: Why the Nondelegation Doctrine May Be Back With More Bite and What It Means for Tax,” 103 Taxes 95, 125 (Mar. 2025) (concluding that “the nondelegation doctrine may be back with greater bite and could significantly reshape tax rulemaking in the years ahead”).

¹⁰⁸ See Walter D. Schwidetzky, “Hyperlexis and the Loophole,” 49 Okla. Law Rev. 403 (1996) (“Complexities are piled on top of complexities. Attempts to eliminate ambiguities rarely succeed; a law that resolves one ambiguity typically spawns many more. This whole process stems, I think, from the deluded belief that it is possible to have a perfect legal system. It is not.”).

¹⁰⁹ As one example, the GILTI high-tax election can be made by a majority of shareholders of a CFC, even though a minority might be adversely affected.

¹¹⁰ Nathan J. Richman, “Collection Suit Parties Debate Loper’s Effect on Precedent,” Tax Notes Federal, May 12, 2025, p. 1121. By contrast, in Facebook, 164 T.C. No. 9, in which an appeal would go to the Ninth Circuit, the court upheld a section 482 regulation by relying in part of the analysis of the arm’s-length standard in Altera (a Ninth Circuit case), even though Altera had decided a different section 482 issue under Chevron.

¹¹¹ As the most prominent recent example, the proposed regulations on the corporate alternative minimum tax, with preamble, were 603 typewritten pages and 182 pages in the Federal Register.

¹¹² 5 U.S.C. section 553(c).

¹¹³ Altera Corp. v. Commissioner, 145 T.C. 91 (2015), rev’d, Altera, 926 F.3d 1061, reh’g denied with dissent, 941 F.3d 1200, cert. denied.

¹¹⁴ Valley Park Ranch LLC v. Commissioner, 162 T.C. 110 (2024).

¹¹⁵ 3M, 160 T.C. 50, 293.

¹¹⁶ Id. at 370.

¹¹⁷ See Mezei and Bond, supra note 33, at 2207-2209 (arguing that there should not be a six-year limitation to APA challenges); Susan C. Morse, “How Late Is Too Late to Challenge Old Tax Regs?” Tax Notes Federal, Aug. 12, 2024, p. 1235.

¹¹⁸ Order on Plaintiff’s Motion for Summary Judgment, supra note 63.

¹¹⁹ It has been suggested that Congress could give taxpayers as a group standing in the Tax Court to challenge a pro-taxpayer regulation, because that court is not an article 3 court subject to judicial limitations such as standing. If the group won, taxpayers relying on the pro-taxpayer regulation held invalid would then have real standing to appeal to a circuit court. Avi-Yonah, “Can Congress Give Unaffected Taxpayers Standing?” Tax Notes Federal, Nov. 4, 2024, p. 981. I am extremely skeptical.

¹²⁰ Loper Bright, 603 U.S. at 396.

¹²¹ Id. at 450-451.

¹²² Id. at 455-456.

¹²³ Michael L. Schler, “Tax Regulations and the Rule of Law,” Tax Notes, Feb. 4, 2019, p. 531 (Schler 1); Schler, “More on Tax Regulations and the Rule of Law,” Tax Notes Federal, Aug. 3, 2020, p. 879 (Schler 2); Schler, “Still More on Tax Regulations and the Rule of Law,” Tax Notes Federal, Dec. 7, 2020, p. 1633 (Schler 3); Schler, “Loper Bright and Pro-Taxpayer Regulations,” Tax Notes Federal, Sept. 2, 2024, p. 1865 (Schler 4).

¹²⁴ See Schler 4, supra note 123.

¹²⁵ For example, reg. section 1.956-1(a)(2), referred to below as possibly violating Loper Bright, is generally a pro-taxpayer regulation because it allows section 245A to reduce section 956 inclusions. However, it could adversely affect taxpayers that would prefer the full inclusion in order to be permitted to use FTCs that would not be available if section 245A applied.

¹²⁶ Coral Davenport, “Behind the Rush to Discard Rules and Reshape Life,” The New York Times, Apr. 17, 2025.

¹²⁷ Robert Iafolla, “Trump’s Deregulatory Moon Shot Stretches Rulemaking Authority,” Bloomberg Business & Practice, Apr. 21, 2025.

¹²⁸ The new proposal is REG-134420-10. The preamble describes the history of the regulation.

¹²⁹ Monisha Santamaria, “Deregulatory Actions Hit the Tax World in Real Time,” Bloomberg Tax, Apr. 24, 2025.

¹³⁰ See Schler 1 through Schler 4, supra note 123.

¹³¹ Reg. section 1.951A-2(c)(7). See Schler 2, supra note 123.

¹³² See Schler 1 and Schler 4, supra note 123.

¹³³ Compare section 168(k)(2)(E)(ii)(I) with reg. section 1.168(k)-2(b)(3)(iii)(B)(1) and -2(b)(3)(vii)(F), Example 6. See also Schler 1, supra note 123.

¹³⁴ Compare section 163(j)(8)(A) with reg. section 1.163(j)-1(b)(1)(iii). See also Schler 3, supra note 123.

¹³⁵ Reg. section 1.59A-3(b)(3)(v). See Schler 4, supra note 123.

¹³⁶ Reg. section 1.1031(k)-1(g)(4).

¹³⁷ Reg. sections 301.7701-1 to -3.

¹³⁸ Compare section 355(e)(2)(B) with reg. section 1.355-7(b)(2) (first sentence).

¹³⁹ Reg. section 1.1001-3.

¹⁴⁰ Reg. section 1.1031(a)-1(b) and (c).

¹⁴¹ Reg. section 1.501(c)(3)-1(b)(1)(iii). Likewise, section 501(c)(4), discussed in connection with Memorial Hermann, requires that the organization be operated exclusively for the promotion of social welfare, but reg. section 1.501(c)(4)-1(a)(2)(i) requires only that the organization be “primarily engaged” in those activities. Compare the “solely for voting stock” requirement for a B reorganization, for which there is no de minimis exception.

¹⁴² Reg. section 1.956-1(a)(2).

¹⁴³ Reg. section 1.863-7(b)(1).

¹⁴⁴ For further discussion of issues facing Treasury under EO 14219, see Monte A. Jackel, “Trump’s Revocation of ‘Unlawful’ Regulations Is a Legal Quagmire,” Tax Notes Federal, May 19, 2025, p. 1155.

¹⁴⁵ Richman, “Tax Watchers Predict New Admin’s Regulatory Imprint in 2025,” Tax Notes Federal, Feb. 10, 2025, p. 1132.

¹⁴⁶ Partnership disguised sales, misuse of the partnership ceiling rule and other partnership allocation issues, unintended results of check-the-box regs, conversion of private equity fees into carried interest, misuse of grantor-retained annuity trusts and other estate planning techniques, uses of section 304 to achieve unintended benefits, non-implementation of section 482 rules for clear reflection of income, elective application of section 382(h) under Notice 2003-65, 2003-2 C.B. 747, the technique endorsed by Notice 2020-75, 2020-49 IRB 1453, to allow deduction of state income taxes by owners of passthroughs and S corps (see Schler 3, supra note 123), and lack of regulations under section 337(d).

¹⁴⁷ E.g., regulations limiting the benefits of cost-sharing were first proposed in 1966, but effective regulations were not finalized until 2011. Elizabeth J. Stevens and H. David Rosenbloom, “Original Sin: Cost Sharing in the United States,” Tax Notes Federal, Nov. 11, 2024, p. 1197.

¹⁴⁸ EO 14215, “Ensuring Accountability for All Agencies,” section 7 (Feb. 18, 2025).

¹⁴⁹ See Notice 2008-83, 2008-42 IRB 905; Notice 2010-2, 2010-2 IRB 251; Albert H. Choi et al., “Crisis-Driven Tax Law: The Case of Section 382,” 23 Fla. Tax Rev. 1 (2019).

¹⁵⁰ This history is described in Daniel Hemel and David Kamin, “The False Promise of Presidential Indexation,” 36 Yale J. Regul. 693, 694-698 (2019).

¹⁵¹ Heckler v. Chaney, 470 U.S. 821 (1985) (rejecting challenge by inmates on death row to the FDA’s refusal to take enforcement action against the state’s use of a drug for a lethal injection).

¹⁵² Maxine Joselow, Hannah Natanson, and Ian Duncan, “Trump Orders the Government to Stop Enforcing Rules He Doesn’t Like,” The Washington Post, May 18, 2025; The White House, “Pausing Foreign Corrupt Practices Act Enforcement to Further American Economic and National Security” (Feb. 10, 2025).

¹⁵³ This has been an issue for both political parties. See, e.g., Richard Rubin, “GOP Accused Democrats of Politicizing IRS. Now Trump Wants It to Punish Harvard,” The Wall Street Journal, Apr. 17, 2025.

¹⁵⁴ See, e.g., Chuck Marr, “Targeting the IRS Shows DOGE’s Stated Purpose Is Just a Pretext,” Bloomberg Tax, Mar. 19, 2025.

¹⁵⁵ Zhang, “Revenue Projections All the Way Down,” Tax Notes Federal, Sept. 18, 2023, p. 2109; The Budget Lab at Yale, “The Revenue and Distributional Effects of IRS Funding” (updated Apr. 24, 2025).

¹⁵⁶ Letter from former Treasury Secretary Janet L. Yellen to IRS Commissioner Charles P. Rettig (Aug. 10, 2022).

¹⁵⁷ Cady Stanton and Doug Sword, “The Final Clawback? Republicans Eye Paths to Nix IRS Funds,” Tax Notes Federal, May 12, 2025, p. 1095 ($21 billion of IRA funding is available but may soon be eliminated, and in any event, less than $1 billion of enforcement dollars remain).

¹⁵⁸ Sword and Benjamin Valdez, “Trump Proposes Slashing IRS Funding to Lowest Level Since 2002,” Tax Notes Federal, May 12, 2025, p. 1086. A May 2 White House fact sheet titled “Ending Weaponization of the Federal Government” justifies the IRS’s budget cut as follows: “The President’s Budget restores IRS as a neutral arbiter that will no longer use weaponized enforcement and overzealous rules against the American people. The Budget proposes to use spending reform to disempower the targeted harassment of conservatives by the IRS.”

¹⁵⁹ Erin Slowey and Zach Cohen, “Musk Group Seeks to Cut 20 Percent of IRS Workforce by May 15,” Bloomberg Tax, Mar. 13, 2025.

¹⁶⁰ Slowey and Naomi Jagoda, “IRS Planned Worker Cuts Would Hit Advocate, Filing Tool Staff,” Bloomberg Tax, Mar. 17, 2025; Caleb Harshberger, “Hundreds at IRS Appeals Office to Take Deferred Resignations,” Bloomberg Tax, Apr. 30, 2025.

¹⁶¹ Andy Kroll, “How DOGE’s Cuts to the IRS Threaten to Cost More Than DOGE Will Ever Save” ProPublica, Mar. 5, 2025 (also citing a GAO report from 2024 finding savings of $13,000 for every hour spent auditing very wealthy taxpayers).

¹⁶² Andrew Duehren and Eileen Sullivan, “More Than 20,000 IRS Employees Offer to Resign,” The New York Times, Apr. 15, 2025.

¹⁶³ Lauren Loricchio, “White House Pressure Forces Some LB&I Employees Out,” Tax Notes Federal, May 5, 2025, p. 940.

¹⁶⁴ Spencer Woodman, “The IRS Unit That Audits Billionaires Has Lost 38 Percent of Its Employees Since January, New Data Shows,” International Consortium of Investigative Journalists, Mar. 28, 2025.

¹⁶⁵ Jacob Bogage, “Tax Revenue Could Drop by 10 Percent Amid Turmoil at IRS,” The Washington Post, Mar. 22, 2025.

¹⁶⁶ Erin Schilling, “More Fallout From IRS Cuts: Audit Delays, Do-Over Risks, Stress,” Bloomberg Tax, Mar. 25, 2025.

¹⁶⁷ Stephen K. Cooper, “IRS Cuts May Delay Taxpayer Help Beyond 2025 Filing Season,” Law360, Mar. 25, 2025.

¹⁶⁸ Woodman, “After Mass Firings, the IRS Is Poised to Close Audits of Wealthy Taxpayers, Agents Say,” International Consortium of Investigative Journalists, Mar. 3, 2025.

¹⁶⁹ Parillo, “IRS Layoffs Could Spark Use of Abusive Tax Shelters, Tax Pro Says,” Tax Notes Federal, Apr. 7, 2025, p. 208. See also David P. Weber et al., “Forced Attrition Will Make Tax Evasion Great Again,” Tax Notes Federal, Apr. 7, 2025, p. 57.

¹⁷⁰ Bogage, supra note 165.

¹⁷¹ Jason Bramwell, “Survey: Some Americans Might Roll the Dice on Not Filing Their Taxes This Year Due to IRS Job Cuts,” CPA Practice Advisor, Mar. 26, 2025; Wes Kosova, “Trump’s DOGE Cuts at IRS Are Tempting Taxpayers to Cheat,” BNA Daily Tax Report, Mar. 28, 2025.

¹⁷² Bogage, supra note 165.

¹⁷³ The Budget Lab at Yale, supra note 155. The corresponding estimated net revenue losses from a 22 percent (or 50 percent) reduction in the IRS’s workforce are $198 billion (or $350 billion) and $1.9 trillion (or $2.4 trillion).

¹⁷⁴ Christopher Anstey, “Summers Says ‘Attack’ on IRS May Risk a $1 Trillion Revenue Hit,” Bloomberg Tax, Apr. 22, 2025.

¹⁷⁵ Schilling, “IRS Effort to End Racial Bias Threatened by Trump DEI Mandate,” Bloomberg Tax, Mar. 18, 2025.

¹⁷⁶ Memorandum of understanding between Treasury and the Department of Homeland Security for the exchange of information for nontax criminal enforcement (Apr. 7, 2025).

¹⁷⁷ The Budget Lab at Yale, “The Potential Impact of IRS-ICE Data Sharing on Tax Compliance,” April 8, 2025.

¹⁷⁸ Id.

¹⁷⁹ Lauren Kaori Gurley and Jacob Bogage, “Deportation Fears Trigger Decline in Tax Filings in Immigrant Communities,” The Washington Post, May 19, 2025.

¹⁸⁰ Id. The latter point is made by Kyle Pomerleau at the American Enterprise Institute.

¹⁸¹ Schilling, “IRS Effort,” supra note 175.

¹⁸² Tarini Parti and Rubin, “DHS Seeks to Deputize IRS Officers to Help With Deportation Effort,” The Wall Street Journal, Feb. 10, 2025.

¹⁸³ Rod Rosenstein, “Tax Leadership Vacuum in Justice Department Must Come to an End,” Bloomberg Tax, Aug. 7, 2024.

¹⁸⁴ Lucero, “Attys Call Ending DOJ Tax Division ‘Epic Failure’ in Efficiency,” Law360 Tax Authority, Apr. 2, 2025.

¹⁸⁵ H.R. 25, 113th Cong. (2013-2014); H.R. 25, 115th Cong. (2017-2018). For a discussion of the nominee’s Senate Finance Committee confirmation hearing on May 20, see Valdez, “Trump’s IRS Pick Unsure if Credits He Promoted Are Real,” Tax Notes Federal, May 26, 2025, p. 1539.

¹⁸⁶ Slowey and Schilling, “IRS’ Core Mission in Doubt as Trump Policies Push Leaders Out,” Bloomberg Tax, Apr. 28, 2025.

¹⁸⁷ Schilling, “IRS Taxpayer Advocate Service Struggles as 400 Workers Depart,” Bloomberg Tax, May 21, 2025.

¹⁸⁸ Natalie Alms, “IRS to Lay Off Taxpayer Experience, DEI Staff,” Nextgov/FCW, Apr. 28, 2025.

¹⁸⁹ Rebecca Chen, “Private Sector Prioritizes Tax Rule Comments to Shrinking IRS,” BNA Daily Tax Report, Mar. 13, 2025 (stating that the American Institute of CPAs has not been able to schedule its semiannual call with the IRS to discuss tax guidance and issues).

¹⁹⁰ Suzanne Monyak, “Justice Department Limits Employee Engagement in ABA Events,” Bloomberg Law, Apr. 9, 2025. The stated reason is that the ABA was a party to a suit challenging the administration freeze on foreign aid funding.

END FOOTNOTES