After the sigh, a gasp

I wrote back in June about how relieved some of us were that the U.S. Supreme Court decided two tax cases this term in favor of the IRS. To have ruled in favor of the taxpayers in either of the cases would have wreaked havoc on the federal tax system.

But as the summer has worn on, a few other decisions that the Court rendered have come to us tax types' attention, and it appears they are going to make trouble for the tax system. Indeed, they're going to create a fair amount of tsuris for the entire federal government of which the tax system is a part.

You may have heard about one of the decisions. In a case called Loper Bright, the Court overruled a 40-year-old precedent known as Chevron. Under Chevron, when a federal statute was ambiguous, as they often are, and a federal agency charged with interpreting that statute wrote a rule clarifying the ambiguity, the federal courts deferred to the bureaucrats, who have a lot more technical expertise than federal judges do about the subect matter of the law.

Under Loper Bright, that deference is now out, and any federal judge can second-guess the administrative agency about what the act of Congress was supposed to mean. With the new decision, every federal regulation, and there are volumes and volumes of them, is subject to being invalidated if a court disagrees with what the agency thought.

It gets worse. In another case, Corner Post, the Court ruled that a regulation can be challenged at any time, no matter how old the regulation is, if the challengers can show that they promptly sued to invalidate the rule as soon as it first applied to them. Of course, a rule can't apply to you before you exist, and so a new company can conceivably challenge the validity of any federal regulation to which it is subject for up to six years after the company is formed.

To say that these decisions will lead to uncertainty about federal law is to put it mildly. And that includes the federal tax law, which could not function without volume upon volume of regulations. With Chevron out the window and an open-ended statute of limitations on the validity of the Treasury Department rules, more taxpayers than ever are going to thumb their noses at the tax regulations and hope to take their chances with someone in a black robe.

Meanwhile, the High Court has ruled that everyone has a constitutional right to a trial by jury before being subjected to a civil fine – at least, a fine for fraud. The case so holding, called Jarkesy, involved the Securities and Exchange Commission and securities fraud penalties, but already the focus is shifting to the IRS. 

Under procedures that have been in place for many decades, if the IRS imposes a civil penalty on a taxpayer, say for fraud, negligence, or disregard of regulations, the taxpayer's place to contest the penalty before paying it has been the U.S. Tax Court. In the Tax Court, there are no juries; your case is heard by a judge, much like the SEC hearing struck down in Jarkesy. You can get a jury to hear your complaint about your tax penalty in a federal district court, but under current statutes, you have to pay the penalty and sue for a refund in order to have your case heard there. 

Jarkesy suggests that that's unconstitutional, at least for fraud penalties and perhaps for some other civil penalties that the IRS can impose. Taxpayers will no doubt be arguing in the months ahead that all sorts of civil tax penalties violate the Constitution.

The majority opinions in Loper Bright and Jarkesy were written by Chief Justice John Roberts, who made his name as a lawyer representing federal agencies before the Supreme Court. He certainly stabbed his old bosses in the back with those two opinions. Taken together, they're a major power grab by the judiciary from the executive branch.

Anyway, although it got its two hard-core tax cases right in this past term, the Supreme Court's administrative law pronouncements are probably going to cause as much heartburn for the tax system as if the Court had gotten the tax cases wrong. All of a sudden, it's the wild, wild West.