Holding Back The Spirit: Loper Bright, Chevron, and QSBS Discernment
The U.S. Supreme Court’s Loper Bright Enterprises v. Raimondo decision in 2024 overruled the Chevron doctrine, a precedent established in the 1984 Chevron U.S.A., Inc. v. Natural Resources Defense Council case. Under Chevron, courts were required to defer to federal agencies' reasonable interpretations of ambiguous statutory language, assuming Congress implicitly delegated such interpretative authority to those agencies.
In Loper Bright, the Court found that this deference undermined the judiciary’s role in interpreting laws. The decision emphasized that statutory ambiguities should not be presumed to grant agencies discretionary authority. Instead, courts must now independently interpret laws without automatically deferring to agency interpretations, ensuring adherence to the letter of the law.
Previously, agencies like the IRS had (in some instances) leveraged the Chevron doctrine to expand their regulatory authority beyond what Congress explicitly intended. By interpreting ambiguous statutes to their advantage, agencies could effectively create de facto rules without going through the formal legislative or rule-making process. Examples of perceived abuses include:
Expansive Rule-making: The IRS occasionally issued regulations or guidance interpreting tax statutes in ways that imposed new obligations on taxpayers or created policies not clearly outlined in the statute.
Overreach in Enforcement: Ambiguities in tax laws were sometimes used to justify aggressive enforcement actions or penalties, even when the statute's intent was unclear or debatable.
Avoidance of Judicial Scrutiny: The reliance on Chevron allowed the IRS to defend its interpretations in court with the expectation that judges would defer to the agency, even when the interpretation stretched the explicit statutory language.
Shifting Guidance: The IRS could issue informal guidance, like notices or memoranda, that effectively changed how tax laws were applied without undergoing the scrutiny or transparency required for formal rule-making.
By overturning Chevron, the Supreme Court has acted to effectively curtail such practices, requiring agencies to base their actions more firmly on clear statutory language rather than stretching ambiguities, or making speculative interpretations to achieve policy objectives. This ensures that agencies, including the IRS, operate within the limits of legislative intent.
Potential Impact on QSBS Audits
As we’ve noted, the Chevron doctrine previously allowed the IRS to interpret ambiguous provisions in tax laws like Section 1202 (QSBS) with significant discretion. This could mean applying broad interpretations to determine whether, for instance, a business activity qualifies or is excluded under the Sec 1202 (QSBS) rules. For instance, if the statute lacked clarity about whether a specific business activity fell under an exclusion, the IRS could (with less oversight) interpret it in a way that favored its enforcement priorities or policy preferences.
With the overturning of Chevron in Loper Bright, the IRS can no longer rely on judicial deference for its interpretations of ambiguous language in QSBS-related audits. Courts must now independently evaluate the statutory language rather than deferring to the IRS's position. This could affect audits in several ways:
Stricter Legal Challenges: Taxpayers disputing IRS audit findings regarding QSBS qualifications now have more incentive to challenge the agency’s interpretation in court, knowing courts will scrutinize the statutory text without automatic deference to the IRS.
Narrower Scope for Interpretation: The IRS must base its audit findings strictly on the explicit language of Section 1202 and related laws. Ambiguities will no longer afford the IRS latitude to impose interpretations not directly supported by the text.
Clearer Burden of Proof: The IRS will face a higher burden to justify its decisions during audits, particularly in areas like defining "excluded business activities" or determining eligibility for QSBS benefits.
Impact on Ambiguous Areas: In cases where QSBS rules are vague or silent, courts—not the IRS—will now play the decisive role in interpreting the law, reducing the IRS’s ability to unilaterally shape QSBS application.
Overall, the Loper Bright decision curtails the IRS's authority in audits involving ambiguous QSBS provisions, requiring stricter adherence to the statute's plain language and limiting the agency's interpretative discretion.
Intent and Clear Meaning
In the course of determining enforcement action, the IRS can always consult legislative history, including congressional meeting minutes, committee reports, and floor debates, to interpret a statute’s purview, but only as a secondary tool. This approach is traditionally used when the statutory text is ambiguous or unclear, as can be the case with interpretations of Sec 1202. However, the Supreme Court’s shift in judicial philosophy here, especially after Loper Bright and other rulings, has curtailed reliance on these materials. Here’s how the use of legislative history and other secondary guidance has generally worked:
If the language of the statute is unclear, legislative history can provide context for Congress’s intent, helping the IRS interpret provisions in a way consistent with that intent. When a statute omits details about how a rule should apply, the IRS might look to legislative history to infer how Congress intended the rule to operate. Legislative history is often cited in IRS regulations or guidance as a basis for specific interpretations of the law.
It’s our opinion that the Supreme Court’s ruling in Loper Bright significantly limits how courts view agencies’ reliance on legislative history and secondary materials. Courts are now instructed to give greater primacy to the plain language of the statute. Legislative history can no longer override or supplement statutory text if the text is clear. Furthermore, Judges may be increasingly wary of relying on legislative history, as it may reflect political negotiation rather than a unified intent, especially if those interpretations do not directly align with the text of the statute.
