Loper Bright rising - Varian highlights the renewed import of statutory text in a post-Chevron world

I. Introduction

In Varian Medical Systems, Inc. v. Commissioner (Varian),¹ the Tax Court previewed the new analytical framework for challenges to Treasury regulations in the Loper Bright² world. The issue in Varian turned on mismatched effective date provisions set forth in the Tax Cuts and Jobs Act (TCJA)³ for interacting amendments to the Code. Specifically, the TCJA set an earlier effective date for the new dividends received deduction under section 245A than for amendments to exclude section 78 deemed dividends from qualification under section 245A, leaving a gap during which section 245A was in effect and the amendments to section 78 were not. Treasury attempted to close this gap by amending its regulations under section 78 to conform the effective dates of the two provisions. In the Tax Court’s reviewed opinion, the court held true to traditional canons of statutory construction, placing large emphasis on the plain and ordinary meaning of text, with no hint of deference to Treasury’s interpretation of the provisions.

The Varian opinion gives a nod to the D.C. Circuit’s recent opinion in Rawat v. Commissioner,⁴ in which D.C. Circuit Court declined to defer to the IRS’s construction of certain partnership tax and international tax provisions of the Code. See our discussion and insights related to the Rawat decision here.

II. Background

Section 245A, a new provision enacted by the TCJA, allows a deduction for certain dividends received from foreign corporations with respect to distributions made after December 31, 2017. Section 78 requires certain taxpayers to treat a portion of their claimed foreign tax credits (FTCs) as dividends received from a foreign corporation for all purposes of the Code (other than section 245, which was not relevant to Varian’s claim). Generally effective for tax years of foreign corporations beginning after December 31, 2017, the TCJA amended section 78 to provide that section 78 deemed dividends are not treated as dividends for purposes of section 245A.

In Varian, a medical device manufacturer sought to claim a section 245A deduction with respect to its section 78 gross-up amount for its fiscal tax year beginning September 30, 2017, and ending September 28, 2018 (2018 Year). On its 2018 Year consolidated return, Varian claimed FTCs and reported a $159 million gross-up as a dividend pursuant to section 78. Varian claimed a deduction under section 245A with respect to this deemed dividend. On examination, the IRS disallowed the deduction. The IRS argued section 78 dividends do not qualify for the section 245A deduction and, alternatively, Varian’s FTCs should be reduced pursuant to section 245A(d) by the amount of deemed-paid foreign taxes attributable to the foreign earnings corresponding to the section 78 gross-up amount. Varian petitioned the Tax Court for a redetermination. The parties filed cross motions for summary judgment in 2023, and, in July 2024, the Tax Court requested both parties submit briefs on the impact of Loper Bright, in which the Supreme Court overturned Chevron.⁵ The Tax Court answered both questions presented in the notice of deficiency “by following the plain text of the relevant provisions.” It allowed the deduction under section 245A with respect to Varian’s 2018 Year section 78 gross-up, but required the taxpayer to reduce its FTCs by the amount of the deemed-paid foreign taxes attributable to the foreign earnings corresponding to the section 78 gross-up amount.⁶

III. Plain Statutory Meaning Reigns Supreme

In Varian, the Tax Court is clear that a statute with an identifiable plain and ordinary meaning requires no further analysis. The Tax Court in Varian cites to six different dictionaries to define the terms “dividend” and “with respect to” to determine the proper application of section 245A. In the court’s determination, informed by these dictionary definitions, authored articles and prior case law interpreting the relevant terms, textual arguments clearly carry the most weight. The court, in reliance upon those materials, including the publication by Antonin Scalia and Bryan A. Garner, Reading Law: The Interpretation of Legal Texts (2012), looks to the plain statutory text and canons of construction, without regard to agency interpretations, legislative history or policy concerns.

For example, the court begins its analysis of whether Varian’s section 78 dividend qualifies as a “dividend received” within the meaning of section 245A by examining the language of the relevant provisions.⁷ Section 78 (prior to amendment by the TCJA) provides that an amount included as income under section 78 “shall be treated for purposes of this title (other than section 245) as a dividend received . . . from the foreign corporation.”⁸ Section 245A authorizes a deduction for “any dividend received from a specified 10-percent owned foreign corporation.”⁹ Because the relevant text in both provisions is “effectively identical,”¹⁰ the court determined the “obvious conclusion is that section 245A and section 78, read together, authorize Varian to deduct its section 78 dividend for the 2018 Year.”¹¹

The court’s discussions of arguments under the TCJA’s effective date provisions and analogizing to sections 275, 964, 1248, and 1291 are similarly replete with direct quotes from the statutory language. Noticeably, the sole Treasury regulation cited in the opinion is the regulation that is challenged, Treas. Reg. § 1.78-1. In discussing the regulation, which Treasury modified in 2019 in an attempt to conform the effective date provision of the section 78 amendments to the effective date provision of new section 245A, the Tax Court did not defer to Treasury’s expertise in the area of applying the tax laws. Rather, the court considered Treasury’s explanation for issuing the regulation. The Tax Court viewed Treasury’s acknowledgement in the preamble to the regulation that the modification was necessary to exclude section 78 dividends from the section 245A deduction as reflecting an understanding that the plain reading of the statute led to the opposite conclusion. Because agency action cannot change a statute’s clear text, the regulation was invalid.

The court’s analysis of Treas. Reg. § 1.78-1 demonstrates a return to Skidmore deference, under which agency rulings, interpretations and opinions are not controlling on the courts, but merely constitute a body of experience and informed judgment to which courts may resort for guidance.¹² The court determines the appropriate (if any) weight to be afforded the regulations in light of the agency’s reasoning, consistency with historical practice and other factors that might make the regulation more or less persuasive. In Varian, the court considered the regulation’s authority and persuasiveness based on an evaluation of the facts and circumstances surrounding the provision, and did not feel compelled to follow Treasury’s determination.

IV. Role of the Courts

Implicit in the Varian ruling are clearly delineated roles for the three branches of government. The court is clear in its discussion that policy-making, including fixing legislative mistakes, is the role of the legislature. Policy considerations are not within the purview of the courts. Achieving a better policy outcome is a task for Congress; a court’s job is to determine a statute’s best meaning using the canons of statutory construction. Although the legislature may grant limited rule-making authority to the executive agencies by statute, as it did in section 245A, such delegations do not authorize Treasury to issue regulations that contradict the unambiguous language of the statute.

Although policy considerations may be taken into account under the “absurd results” doctrine, which allows a court to depart from a statute’s clear text in certain circumstances, the court in Varian notes the doctrine “imposes a high bar.”¹³ The absurd results doctrine is available to inform a court’s interpretation of a statute’s text only if the result following the plain meaning of the text is one that “shocks the general moral or common sense” or is one that it is “quite impossible that Congress could have intended.”¹⁴ In Varian, the IRS declined to invoke the doctrine, which the court characterized as a “wise” decision.

V. Impact of Loper Bright

It is important to note that the Tax Court’s reviewed opinion in this case directly addresses the impact of Loper Bright, the landmark case in which the Supreme Court overturned the longstanding Chevron deference to reasonable agency interpretations of ambiguous statutes.¹⁵ Initially, the IRS sought to rely on Chevron, arguing that Treasury amended Treas. Reg. § 1.78-1 to fill in the gap of an ambiguous statute and that the Tax Court should defer to Treasury’s interpretation which barred Varian’s deduction. However, Chevron was overturned before the Tax Court ruled on the IRS’s arguments.

Following Loper Bright, the only permissible interpretation of a statute is the “single, best meaning” of the statute, as determined by the court, regardless of whether the statute is ambiguous or clear.¹⁶ In Varian, the Tax Court suggests the result may have been the same even under Chevron, which required deference to permissible agency interpretations only if a statute was ambiguous. The court is explicit that the relevant effective date and operative provisions at issue in Varian could not have been more clear. Thus, presumably, the issue in Varian would not have proceeded to Chevron’s second step and Treas. Reg. § 1.78-1(a), as modified in 2019, may have been invalid even pre-Loper Bright. Similarly, in YA Global Investments, LP v. Commissioner, in which the Tax Court issued an order one day after the Varian opinion, the court determined that Loper Bright was not “an intervening change in controlling law” because the court’s initial decision did not rely on Chevron.¹⁷ The court went further, perhaps as an admonition to the tax community, stating “[w]e do not need help from the Treasury Department to judge tautological arguments as unavailing.”

Varian demonstrates that Loper Bright has changed the framework of the analysis. Successful arguments will focus on statutory text and canons of construction, with less (if any) weight given to policy considerations. We can expect to see a return of sentence diagrams, dictionary references and a detailed reading of the text. If the Varian opinion signals what is to come, arguments based on regulations, administrative (or even technical) expertise, Congressional intent, or overarching policy concerns will carry little (if any) weight.

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_{1  163 T.C. No. 4 (Aug. 26, 2024).
2  Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024).
3  Pub. L. No. 115-97, 131 Stat. 2054 (2017).
4  108 F.4th 891, 896 (D.C. Cir. 2024).
5  Chevron USA Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).
6  Varian, 163 T.C. No. 4, 3.
7  Id. at 13.
8  Id.
9  Id.
10  Id.
11  Id. at 14.
12  Skidmore v. Swift & Co., 323 U.S. 134 (1944). See also Kisor v. Wilkie, 588 U.S. 558 (2019) (providing that it is the court’s responsibility, “using all their normal interpretive tools,” to decide whether Congress has addressed a given issue). Kisor significantly limited Auer deference, as set forth in Auer v. Robbins, 519 U.S. 452 (1997) (providing that that when the meaning of a regulation is ambiguous, the promulgating agency’s interpretation controls unless it is plainly erroneous or inconsistent). Treasury subsequently instructed that Auer should not be invoked in defense of any Treasury regulation. Department of the Treasury, “Policy Statement on the Tax Regulatory Process,” (Mar. 5, 2019) (available at https://home.treasury.gov/system/files/131/Policy-Statement-on-the-Tax-Regulatory-Process-3-4-19.pdf). As we mentioned in our Rawat alert, it is hard to see how a court could invoke Auer deference today given Justice Robert’s analysis of the relationship of the courts to administrative agencies in Loper Bright, thus it is potentially apt to say that post-Loper Bright, Auer deference is dead.
13  Varian, 163 T.C. No. 4, 25.
14  Id.
15  467 U.S. 837 (1984).
16  Loper Bright, 144 S. Ct. at 2266.
17  T.C. No. 14546-15 (Aug. 27, 2024).}