Chevron is Overruled– Impact on WB Cases?

On June 28, 2024, in the Loper Bright Enters. v. Raimondo case, the Supreme Court of the United States ruled that the Administrative Procedure Act (APA) requires courts to exercise their independent judgment in deciding whether an agency like the IRS has acted within its statutory authority, and courts may NOT defer to an agency interpretation of the law simply because a statute is ambiguous, overruling its 40 year old decision called the Chevron doctrine (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984)).  Notably, in a 6-3 decision, with Chief Justice Roberts writing for the majority, returned to 1946 when Congress enacted the APA “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices” and signaled “the culmination of a comprehensive rethinking of the place of administrative agencies in a regime of separate and divided powers.”  As the Court notes, “In addition to prescribing procedures for agency action, the APA delineates the basic contours of judicial review of such action” and with Section 706 specifically directing a reviewing court to decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of an agency action.  5 U.S.C. 706.  It further requires courts to hold unlawful and set aside agency action, findings, and conclusions found to be not in accordance with law.  706(2)(A).  Or as Justice Roberts put it, courts (not agencies) decide legal questions by applying their own judgment.  As put, the APA incorporates the traditional understanding of the judicial function, under which courts must exercise independent judgment in determining the meaning of statutory provisions, and in exercising that judgment, may be aided by an agency’s view, such as when statutes expressly delevant to an agency the authority to give meaning to a particular statutory term.  As further clarified in this decision, a court fulfills its role by recognizing constitutional delegations, fixing the boundaries of the delegated authority, and ensuring the agency has engaged in REASONED DECISIONMAKING within those boundaries.  As such, the deference that Chevron required of courts reviewing agency action went too far.

As courts decided that Chevron rested on a presumption that Congress, when it left ambiguity in a statute meant for implementation by an agency, understood that the ambiguity would be resolved, first and foremost, by the agency and desired the agency (rather than the courts) to possess whatever degree of discretion the ambiguity allows.  But this was never squared with the APA, and in fact, Chevron defies the command of the APa that the reviewing court, not the agency whose action it reviews, is to decide all relevant questions of law and interpret statutory provisions.  Since Chevron demanded that courts mechanically afford binding deference to agency interpretations, including those that have been inconsistent over time or even when a pre-existing judicial precedent holds that the statute means something else.   “Chevron has proved to be fundamentally misguided” and “unworkable.”  Rather than safeguarding reliance interests, Chevron affirmatively destroys them, as a statutory ambiguity, no matter why it is there, becomes a license authorizing an agency to change positions as much as it likes, with unexplained inconsistency being at most.. a reason for holding an interpretation to be arbitrary and capricious, and Chevron thus allowed agencies to change course even when Congress has given them no power to do so, fostering unwarranted instability in the law.  Chevron was a judicial invention that required judges to disregard their statutory duties, Justice Roberts writes.  The APA bars judges from disregarding their responsibility (to independently evaluate a statute) just because the Executive Branch agency views a statute differently.

For the whistleblower statute, the question may become whether the particular Section 7623 statute is seen as delegating authority to the IRS consistent with constitutional limits, how will the Tax Court now look to respect that delegation, while at the same time, ensure that the IRS acts within it, especially when the Supreme Court states that “courts need not and under the APA may not defer to an agency interpretation of the law simply because a statute is ambiguous.”

Prior decisions in the whistleblower area have at times cited to the APA for the proposition that:

“the usual summary judgment standard is less apt in a case like this one, where we must confine ourselves to the administrative record to decide whether there has been an abuse of discretion.  See Van Bemmelen v. Commissioner, 155 T.C. 64, 78 (2020).  In such a case, generally there will be no trial on the merits.  Therefore, when we review final agency action under the APA, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law.  Van Bemmelen v. Commissioner, 155 T.C. at 79.”  Rogers v. Commissioner, 157 T.C. 20, 25-26 (2021).

As noted in Rogers, the Supreme Court has held that a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, like the WBO, “must judge the propriety of such action solely on the grounds invoked by the agency.”  SEC v. Chenery Corp. (Chenery I), 318 U.S. 80 (1943); SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947).  As noted by the Tax Court further in Kasper v. Commissioner, 150 T.C. 8, 23-24 (2018):

Under the Chenery doctrine, we can uphold the WBO’s determination only on the grounds it actually relied on when making its determination…This means that the WBO must clearly set forth the grounds on which it made its determinatoin, so that we don’t have to guess…. We cannot uphold the WBO’s determination simply because findings might have been made and considerations might be disclosed which might justify his ultimate conclusion.  Antioco v. Commissioner, T.C. Memo 2013-35, at *25 (citing Chenery I, 318 U.S. at 93-94)”

Thus, as the Rogers decision notes, the Tax Court reviews WBO determinations by reference to the grounds that it states, not by reference to post hoc rationalizations, and may consider any contemporaneous explanation of the agency decision contained in the record.  Rogers, 157 T.C. at 33 (a “decided not to pursue” explanation was in effect saying to Mr. Rogers, “we reject your claim because we are denying the claim”—a self-contradictory and therefore, impermissible, determination that equated to Yogi Berra’s advice that when he came to that “fork in the road” and “took it”—it made sense to him because in context, both prongs of the fork led to his home—but the two prongs of the WB regulations–rejection and denial–lead to two different places.  Thus, the Tax Court in Rogers, denied the IRS’s motion for summary judgment.

However, in Lissack v. Commissioner, 68 F.4th 1312 (D.C. Cir. 2023), the WB Lissack submitted information to the IRS that he thought showed that a condo development group evaded taxes through its treatment of golf-club membership deposits, and the IRS deemed the information to be sufficiently specific and credible to warrant opening an examination, but later concluded that the membership deposits were correctly reported.  Through its own further investigation, the IRS discovers an unrelated problem–the same taxpayer had taken in impermissible deduction on intercompany bad debt, and this leads to a large civil tax adjustment.  The claim by Lissack for a share of that recovery was rejected.  While the appeals court agrees with the Tax Court that it had jurisdiction over the matter, it found that the WBO’s denial of an award rested on an reasonble application of a valid rule to the facts reflected in the administrative record.   The decision reviews the “mandatory award provision” in Section 7623(b)(1) and the “judicial review provision” in Section 7623(b)(4).  And it notes how the IRS made the argument that if a threshold rejection of a submission by a WB for vague and speculative information in advance of a referral to the IRS for examination was not a reviewable determination regarding an award within the meaning of the judicial review provision, under Li v. Commissioner, 22 F.4th 1014, 1017 (2022), then the Lissack claim was also not a reviewable determination.

However, at issue in Lissack was 3 parts of a regulation referred to as the Whistleblower Definitions Rule: (1) the definition of “administrative action” (2) one of the examples illustrating what counts as the Service proceeding with an administrative action based on whistleblower information; and (3) the definition of “related action”.  26 CFR Sections 301.7623-2(a)(2), (b)(2)(Example 2), and (c)(1).  In defining how the Service “proceeds” with an action “based on” whistleblower information, in a (b)(1) claim, this “Rule” distinguishes IRS administrative actions subject to the mandatory-award provision from those not triggering such awards and does so by saying that the information provided must substantially contribute to an action against a person identified by the whistleblower.

Yet, the appeals court notes that in granting summary judgment, the Tax Court had not difficulty claiming that this Rule (and the Regulations) passes muster under Chevron, because the statute does not describe or define an “administrative or judicial action”—leaving ample scope to the Secretary to define the term to refer to “all or a portion of an IRS civil or criminal proceeding”—seeing the statutory language as ambiguous as to whether an expanded portion of an examination is a separate administrative action and as to what kinds of whistleblower contributions require an award.—and thus, given that ambiguity–the Tax Court deferred to the IRS—finding that the Whistleblower Definitions Rule reasonably interprets the statutory terms “administrative action” and “proceeds based on.”  The appeal court rejected Lissack’s argumen that Section 7623(b) was unambiguous, and applied the Chevron doctrine, 2 step approach, to find that the IRS definition of “administrative action” and Example (2) as permissible interpretations of Section 7623.

It remains to be seen how the Tax Court will apply these standards moving forward.