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Supreme Court overturns Chevron doctrine
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Overturning the 40-year-old Chevron doctrine, the Supreme Court held that under the Administrative Procedure Act (APA), courts must exercise independent judgment in deciding whether an agency has acted within its statutory authority, and they may not defer to an agency’s interpretation of the law simply because a statute is ambiguous.
Chevron doctrine
Under the Chevron doctrine, which was set out in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), a court is required to use a two-step framework to interpret statutes administered by federal agencies. If a case satisfies the various preconditions for application of the doctrine, a reviewing court must first assess whether Congress has directly spoken to the precise question at issue in the statute. If, and only if, congressional intent is clear from the language of the statute, that is the end of the inquiry. But if the court determines that the statute is silent or ambiguous with respect to the specific issue at hand, the court must, in the doctrine’s second step, determine if the agency’s interpretation is based on a permissible construction of the statute. If it is, the court must defer to the agency’s interpretation, regardless of whether the court believes that the agency’s interpretation is the best reading of the statute.
Initially, it was not clear whether the Chevron doctrine applied to interpretive tax regulations, and a circuit split developed on the issue. However, in 2011, in Mayo Foundation for Medical Education and Research, 562 U.S. 44 (2011), the Supreme Court held that Chevron deference applies to interpretive tax regulations issued under Sec. 7805(a), which gives a general grant of authority to Treasury to “prescribe all needful rules and regulations for … enforcement” of the Code.
Case background
To prevent overfishing and provide management of fishery resources, Congress passed the Magnuson-Stevens Fishery Conservation and Management Act (MSA), P.L. 94-265, which extended the jurisdiction of the United States to 200 nautical miles beyond the U.S. territorial sea of 12 miles off the U.S. coast and claimed “exclusive fishery management authority over all fish” within that area. The Secretary of Commerce delegated administration of that area to the National Marine Fisheries Service (NMFS).
The MSA established eight regional fishery councils that develop fishery management plans that further the MSA’s fishery conservation and management goals. The MSA allows these plans to require domestic fishing vessels to carry observers on board during fishing trips for the purpose of collecting data necessary for the conservation and management of the fishery. The MSA specifically requires three types of vessels to cover the costs of the observers that the plans require them to take on fishing trips. For other vessels, including those in the Atlantic herring fishery, the act does not address whether the vessels may be required to pay the costs of observers.
Nonetheless, in 2013, under a fishery management plan proposed for the Atlantic herring fishery by the New England Fishery Management Council, vessel owners were required to fund the costs of having an observer on some fishing trips. The NMFS later included the plan in regulations it promulgated. The NMFS estimated that the cost of an observer for these trips would be up to $710 per day and would reduce annual returns to vessel owners by up to 20%.
Several family-owned businesses that operated in the Atlantic herring fishery, including Loper Bright Enterprises, challenged in district court the regulations requiring them to pay observer costs, arguing that the MSA does not authorize the NMFS to mandate that they pay for observers required by a fishery management plan.
The district court granted summary judgment to the government, concluding that the MSA unambiguously authorized the regulation (Loper Bright Enterprises v. Raimondo, 544 F. Supp. 3d 82, 107 (D.C. 2021)). The court further noted that even if the MSA was ambiguous on the point, the NMFS’s interpretation of the act in the regulations was entitled to deference under the Chevron doctrine. The fishing businesses appealed the court’s decision to the D.C. Circuit.
The D.C. Circuit affirmed the district court (Loper Bright Enterprises v. Raimondo, 45 F.4th 359 (D.C. Cir. 2022) ). While the court did not find, as the district court had, that the MSA unambiguously allowed the NMFS to require Atlantic herring fisherman to pay for observers, it found, like the district court, that the NMFS’s interpretation of the MSA was reasonable and was entitled to deference under the Chevron doctrine.
In a separate case, two corporations and a limited liability company that owned two fishing vessels also challenged in a district court in the First Circuit the regulations requiring them to pay for the costs of observers for trips into the Atlantic herring fishery as being unauthorized by the MSA. The district court, applying the Chevron doctrine, deferred to the NMFS’s interpretation of the MSA and granted the government summary judgment (Relentless, Inc. v. U.S. Dep’t of Commerce, 561 F. Supp. 3d 226 (D. R.I. 2021)). The First Circuit affirmed the district court, also applying the Chevron doctrine (Relentless, Inc. v. U. S. Dep’t of Commerce, 62 F.4th 621 (1st Cir. 2023)).
The petitioners in both cases appealed the decisions of the appellate courts to the Supreme Court, which agreed to hear both cases. However, the Court limited its review to the question of whether the Chevron doctrine should be overruled or clarified.
The Supreme Court’s decision
The Supreme Court, in overruling the Chevron doctrine, held that the APA requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency’s interpretation of the law simply because a statute is ambiguous.
Historical role of courts
The Supreme Court first discussed the historical role of the courts. It explained that the nation’s Founders, as expressed in The Federalist Papers, envisioned that the interpretation of laws was the province of the courts. In the Court’s foundational case Marbury v. Madison, 5 U.S. 137 (1803), and later cases, the Court held likewise.
The Supreme Court recognized from the beginning, though, that in performing this duty, courts would accord due respect to executive branch interpretations of the law where appropriate, particularly if that branch’s interpretation was issued roughly contemporaneously with the enactment of the statute and remained consistent over time. However, although the executive branch’s interpretation could inform the judgment of a court, it did not supersede it. Thus, where a court’s judgment differed from that of the executive branch, the court was not at liberty to surrender or waive its own judgment and replace it with that of the executive branch.
The Supreme Court noted that during the expansion of the administrative process during the New Deal era, a court often treated an agency determination of facts as binding but did not extend that deference to agency resolutions of questions of law; none-theless, a court could give the executive branch’s informed judgment about the interpretation of the law great weight if it was deserved. Courts also would give a deferential review if they concluded that an agency was empowered by a statute to decide how a broad statutory term applied to specific facts. This deferential review, which courts did not apply consistently, was narrowly confined to the facts. However, this deference, the Supreme Court stated, did not resemble the deference that it began applying to agency interpretations of statutes under the Chevron doctrine.
Role of courts under the APA
The Supreme Court then laid out what the APA required of courts when reviewing agency actions. The APA, enacted in 1946, besides prescribing procedures for agency action, also outlines the basic contours for judicial review of agency action.
The Supreme Court noted that the APA, in 5 U.S.C. Section 706, provides that in a review of agency action, “the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” Pointing to the language “all relevant questions of law,” the Court held that the APA requires that courts, not agencies, review all questions of law when reviewing an agency action, including questions involving ambiguous laws, and set aside any agency action that is inconsistent with the law as the court interprets it.
Because the APA provides no deferential standard for courts to use in answering questions of law and directs courts to interpret constitutional and statutory provisions in the same manner, the Court found that the APA makes clear that agency interpretations of statutes, like agency interpretations of the Constitution, are not entitled to deference. Thus, under the APA, the Court stated, quoting Perez v. Mortgage Bankers Ass’n, 575 U. S. 92, 109 (2015) (Scalia, J. , concurring in judgment), it gremains the responsibility of the court to decide whether the law means what the agency says.h
The Supreme Court further found that in exercising their judgment in interpreting statutory provisions, consistent with the APA and as they had in the past, courts could seek the aid of agency interpretations implementing the statute at issue. Especially useful, the Court stated, are agency interpretations issued contemporaneously with the statute that have remained consistent over time.
Also, the Court found that if the best reading of a statute indicates a delegation of discretionary authority to an agency, under the APA, the reviewing court is still required to independently interpret the statute. The court properly does so by determining the constitutional delegation, fixing the boundaries of the delegated authority, and ensuring the agency has engaged in reasoned decision-making within those boundaries.
Chevron doctrine does not reconcile with the APA
Having determined the correct role of courts under the APA, the Supreme Court determined that the Chevron doctrine, which gave binding deference to agency interpretations of statutes, could not be reconciled with the APA, describing the Chevron doctrine’s regime as “the antithesis of the time honored approach the APA prescribes.” The Court found that presuming that statutory ambiguities are implicit delegations to agencies did not help in this regard because, for a number of reasons, this presumption did not approximate reality, and a presumption can be used in statutory interpretation only to the extent it approximates reality. The Court also found that the presumption was misguided because agencies have no special competence in resolving statutory ambiguities.
Stare decisis
In addition to finding that the Chevron doctrine should not be upheld for substantive reasons, the Supreme Court concluded that it was not required by stare decisis, the doctrine governing judicial adherence to precedent, to uphold the Chevron doctrine. The Court found that stare decisis did not apply to the precedent it set in Chevron because the reasoning in Chevron was misguided because it did not take the APA into account, it had produced an unworkable standard, and it had not fostered meaningful reliance.
Reflections
While the Court overruled the Chevron doctrine, it held that the prior holdings under the framework of the Chevron doctrine that agency actions were lawful are still subject to stare decisis (including the holding regarding the Clean Air Act in Chevron itself). The Court stated that reliance on the Chevron doctrine was not a special justification that would justify overruling these holdings.
The decision’s effect on tax regulations going forward remains to be seen. Regulations that have been upheld using the Chevron doctrine are presumably safe, but many other Treasury regulations may be subject to challenge. One study cited by the Congressional Research Service found that Treasury devoted more resources to promulgating regulations under the notice-and-comment procedures of the APA after the Mayo Foundation case was decided, presumably so they would qualify for Chevron deference (Gravelle, Marples, and Barczewski, “The Possible Elimination of Chevron Deference: Potential Implications for Tax Revenue and Administration” (Congressional Research Service 4/8/24)). With Chevron overruled, challenges to tax regulations may increase . And the possibility of differing judicial interpretations of tax regulations in different courts will also increase.
Loper Bright Enterprises, Inc. v. Raimondo, No. 22-451 (U.S. 6/28/24)
Contributor
James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.