INTERVIEW: Andy Grewal
Andy Grewal is a professor at the University of Iowa College of Law, with a specialty in income tax law. He recently published a paper, Tax Regulations After Loper Bright, examining the effects of the recent U.S. Supreme Court case Loper Bright Enterprises v. Raimondo on the tax field. In Loper Bright, the Court repealed the prior standard of judicial deference to agency interpretations of federal statutes--often called Chevron Deference--in place of a higher standard of scrutiny. We spoke on Sept. 4.
I was reading your paper about how Loper Bright is going to affect tax regulations. And I'm curious about what this would mean for international taxes. So maybe just to start, taking a step back, what is it that makes tax regulations different in this regard, if there is any difference?
That's a good question, as to whether there is a difference. One thing that jumped out to me in writing the paper was that there seems to be a fairly well-entrenched pattern of judicial deference to tax regulations, that may be unique, or relatively unique, in the federal system. That is, the Court has spoken about deference for tax regulations for almost 100 years. And maybe for the first 10 or 15 years, deference was used casually. That is, the Court said it was deferring to tax regulations, but it was just deferring to the results that it would have reached anyway. But by the mid-1940s and certainly by the mid-1960s, the Court was very clear, a Treasury regulation does not have to be the best interpretation of a statute for the Supreme Court to uphold it. In other words, tax regulations had Chevron before Chevron. The Court was very overt. You do not need the best interpretation embodied in a regulation for the regulation to be upheld.
And so that now is sort of under reconsideration because of the fact that Chevron has been mostly overturned?
Chevron said that you don't need the best interpretation of a statute, and Loper Bright said, actually, you always do. You must always apply the best interpretation. And Loper Bright understood Chevron as a departure. Loper Bright said before Chevron, courts always followed the best interpretation. That's definitely not true for the tax context. Maybe it's true for some other contexts, I haven't read every other federal field. But it is clear that before Chevron, Treasury regulations could depart from the best interpretation of a statute and be upheld by courts, including the Supreme Court. So Loper Bright isn't overturning just Chevron, it's overturning decades of tax practice that preceded Chevron.
So you mentioned how tax law is just kind of uniquely ambiguous, if I heard you right. It seems like international might be special even within tax law. That's what's always struck me about the area, that provisions like [Section] 482 are really short and to-the-point, and then you have so much regulatory law that's out there. So how will this be affected by this new paradigm?
There are a couple angles to it. One, ambiguities exist across any federal statute, so tax isn't necessarily unique in that respect. But tax may be unique in the sense that it applies to so many factual scenarios, and to essentially all Americans. The more situations a statute applies to, the more ambiguities that will arise. Most Americans will never meaningfully interact with any federal agency except the IRS, or perhaps the Social Security Administration as they age. But most Americans do not interact with the EPA in any meaningful way. And so if a statute has to apply in a million scenarios, or 10 million scenarios, as opposed to 100,000--two statutes may each contain ambiguities, but there's a lot more pressure on the ambiguities for a statute that applies widely, because you're going to have more tough cases.
And then, with respect to the international tax system, you also have wild changes in the international economy. If you look back at the original reports related to the 1960s reform. Congress established an international tax regime, and--I'll just come up with a number--I think they said that their new Subpart F and so on would affect a few $100 million of income. But now we know that cross-border activity is much more robust. So it's the same principle as before--that is, you may have international tax statutes that are technical. Maybe they're not necessarily inherently more ambiguous than an environmental statute, but they are applying to a lot more taxpayers in a lot new ways, such that there's a lot more pressure on the statute, given the ambiguities and the greater number of unforeseen circumstances.
There has been this recent history of the courts being more willing to look at tax regulations as not being different from the rest of law. There was the decision that said that the [Administrative Procedure Act] applies, which was a precedent. So moving forward, do you think we're in a world where there's just going to be a lot more challenges to tax regulations, or is it going to be that courts continue to look at taxes as kind of a separate beast?
I think the Court in Loper Bright introduced a way in which we've established the two-tier system for regulations. The Court seems to say that, if a regulation relies on factual matters within the agency's expertise, the court should weigh the agency's regulation quite a bit. So if a statute prohibits pollutants, courts don't have scientists, the EPA does, and if the EPA has a bunch of scientists who produce a report on what's a pollutant, Loper Bright counsels for quasi-deference for the EPA determination.
This analog doesn't work so well for tax because the Treasury Department is, for the most part, making legal interpretations about code provisions--that is, the Treasury isn't employing a bunch of scientists to make complex factual determinations under the Internal Revenue Code. So we might see this new system where agencies with a lot of subject or factual-based experts get more deferential review than the Treasury, because the Treasury's expertise largely is understanding the Internal Revenue Code, not understanding biology, chemistry and so on. But understanding the Internal Revenue Code isn't the type of expertise that the Court in Loper Bright was particularly concerned about. In fact, the Court said agencies are not experts at interpreting statutes. Courts are. So I do think we may see a break here from between the Treasury and similarly situated agencies and agencies that do rely on factual expertise rather than legal expertise.
So there may actually be more scrutiny of tax regulations, is what you're saying?
In a relative sense, absolutely, because a Treasury won't hang its hat, necessarily, on factual determinations. But these things are dynamic. Maybe the Treasury can style regulations on digital services taxes, for example, as grounded in a fact finding. That's not how the current foreign tax credit regulations are styled. But if it does so, if it can rebrand its regulations as grounded in factual determinations about international competitiveness, and so on, maybe it can bootstrap its way into this higher standard or higher respect offered by Loper Bright.
But as you said, it's not like Treasury has digital specialists on staff. They have economists, but they're not people who have some special expertise in the digital economy.
My sense is that, sure, there are exceptions, but I don't think that the Treasury when it issues international tax regulations they are including in the preambles empirical analyses done by economists. Maybe that's going to change. Maybe if you have an international tax regulation and the preamble has a section on empirical studies done by economists that could be an analog to chemical studies done by EPA scientists. I don't know, but certainly the incentive is there if you want to get more deference.
Obviously, one of the big contexts here is the Moore case. [See my interview here with law professor David Gamage about Moore.] A lot of people were thinking that there might be an upheaval of the whole system. The Supreme Court ultimately kind of said, "There are some implications here moving forward, but we don't see this as being something that would change the current system." Does that show there is some reluctance to really dive into the international sphere from the courts?
Generalists typically aren't interested in learning about international tax, but the Court has taken some international cases. There was a case called [PPL Corporation v. Commissioner of Internal Revenue], which had to do with the credibility of foreign taxes. If the issue is big enough, and if you get industry behind a cert petition that relates to a particularly controversial international tax rule, I don't see any reason why that rule would be inoculated. In fact, given the dollars involved, I might think they may be especially susceptible after Loper Bright.
So one thing for people who've been following international taxes for a while, the system has just been under a lot of strain. Lately, you've had these big changes at the OECD level. We're still a few years out from the TJCA and the big changes it made. And I'm wondering, is this just going to be more unpredictability added to a system that's already pretty unpredictable, the fact that there might be more challenges and more regulations that are thrown out?
It really depends on the Congressional response. I think the indication from Loper Bright is that Congress is going to need to take a more active role in fashioning the rules that govern international commerce. That is, maybe it was a case that ambitious Treasury regulation projects could help coordinate the Internal Revenue Code with other policies. But now I think it's clear that to coordinate these policies, Congress is going to need to take a heavier hand rather than rely on ambitious Treasury regulations.
Contact the author at amparkerdc@gmail.com.