Loper Bright Nudges Transfer Pricing Rules Toward Chopping Block

The US Supreme Court’s decision in Loper Bright Enterprises v. Raimondo has far-reaching implications for nearly every federal agency and its rulemaking efforts, including the Treasury Department and IRS. Without Chevron deference, taxpayers have better odds when challenging Treasury regulations. Those odds increase where Treasury and the IRS have promulgated expansive regulations based on a single and unclear delegation of authority, like they have under Section 482.

We already saw some Treasury regulations undermined in Varian Medical just last month. Without looking to the pertinent regulation at all, the US Tax Court found that the clear effective dates in the pertinent statutes—Sections 245A and 78—entitled the taxpayer to the deduction it had claimed.

The Tax Court turned to the Treasury regulation only after it had comprehensively analyzed the statutory language and decided what it meant. And because the court had already determined that the statute entitled the taxpayer to the deduction, it refused to apply the Treasury regulation that would have altered the effective dates and denied the deduction because that regulation “contradicts the statutory text.”

Not every case will present such a clear contradiction, and some Treasury regulations will raise questions about the scope of the power delegated to the IRS and the Treasury. Nevertheless, Loper Bright puts the onus on courts to scrutinize those delegations. The majority directed courts to fulfill the roles of “fixing the boundaries of delegated authority” and “ensuring the agency has engaged in ‘reasoned decisionmaking’ within those boundaries.”

It follows that the more expansive the regulatory system, the likelier that courts will scale it back. An expansive system is more likely to push or exceed the boundaries of delegated authority and has more rules that must be tested against the “reasoned decisionmaking” standards in the Administrative Procedure Act.

There’s good reason to think that given their breadth, the validity of many Section 482 regulations is now precarious. Whether any given rule or portion of the Section 482 regulations can survive a challenge depends, among other things, on the particularities of that rule, the Treasury and the IRS’s rationale for the rule, their responses to comments received during the rulemaking process, and the processes they followed in enacting the rule.

But there are a few general observations about the transfer pricing regulations worth making in the wake of Loper Bright. First, the precise boundaries of Congress’ delegation to the IRS in Section 482 are unclear. Only its first and third sentences appear to delegate authority to the IRS.

The first sentence contemplates that the IRS can make allocations on a case-by-case basis, providing that the IRS’s power to “allocate gross income” applies “[i]n any case” that involves entities owned or controlled by the same interests. But that delegation doesn’t expressly delegate broad rulemaking power to the Treasury and the IRS.

The third sentence—added as part of the Tax Cuts and Jobs Act—appears to delegate something like rulemaking authority, directing the IRS to require specific valuation approaches. But that delegation applies only to “transfers of intangible property.”

Second, we know—from case law and from the agencies’ own regulations and guidance—about a very real boundary circumscribing every agency action under Section 482, including any rulemaking efforts. That boundary is economic: “the standard to be applied in every case is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer.”

Courts have enforced this boundary in evaluating the transfer pricing regulations. By charging courts with “fixing the boundaries of delegated authority,” Loper Bright should be understood to recommit the courts to that enforcement.

The observations above lead to a third, and perhaps most important, point. Several portions of the Section 482 regulations are especially at risk because they test that economic boundary. Specifically, the Treasury and the IRS promulgated several rules under their cost-sharing regulations in response to high-profile losses.

Those rules—regarding the costs of stock-based compensation and platform contribution transactions—are inherently suspect after Loper Bright because they involve the agencies’ attempts to change their fortunes under Section 482 without any intervening congressional changes to that statute.

It is reasonable to think those rules may exceed the delegation in Section 482 or attempt to undo prior court interpretations of that section (or both) and therefore may be on the chopping block. Neither a conceptually questionable treatment of future distribution rights as intellectual property nor an offhand circuit court footnote about the effect of those regulations may suffice to protect them.

The case is Loper Bright Enterprises v. Raimondo, U.S., No. 22-451, decided 6/28/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Steve Dixon is partner at DLA Piper with focus on issues at the forefront of IRS controversies, such as transfer pricing disputes and challenges to Treasury regulations.

Joseph Myszka is partner at DLA Piper with focus on resolving complex tax disputes and the US federal income tax implications of cross-border operations.

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