On June 26, 2019, the US Supreme Court issued its opinion in Kisor v. Wilkie.1 The Court declined to overturn Auer v. Robbins2 and Bowles v. Seminole Rock & Sand Co,3 but reinforced the limits on the applicability of the doctrine of judicial deference to agency interpretations of their own regulations.
Background: Kisor’s Case
Kisor involves a Marine veteran, James L. Kisor, who sought compensation benefits related to PTSD from the US Department of Veterans Affairs (VA). The VA refused to grant retroactive benefits to Kisor, despite agreeing that he suffers from PTSD, based on the VA’s interpretation of its own regulation governing the application of retroactive benefits.
The US Court of Appeals agreed that Kisor and the VA both presented reasonable constructions of the regulation, thus rendering it ambiguous. The Court of Appeals then deferred to the VA’s interpretation of the regulation, based on the principle of judicial deference to an agency’s interpretation of its own regulations, as established in both Auer and Seminole Rock. The Supreme Court limited its review to one of the questions presented in the petition for certiorari: whether the principle of deference to administrative interpretations of regulations articulated in Auer and Seminole Rock should be overruled.4
The Supreme Court’s Decision
The Supreme Court, in a unanimous decision,5 vacated and remanded the US Court of Appeals’ decision, upholding Auer, but reinforcing the limits on its application. Justice Kagan authored the opinion, which held the doctrine of deference to administrative interpretations of their own regulations to be “potent in its place but cabined in its scope.”
The Court articulated four limits to the application of Auer deference: (1) “a court should not afford Auer deference unless the regulation is genuinely ambiguous”; (2) “before concluding that a rule is genuinely ambiguous, a court must exhaust all the ‘traditional tools’ of construction”; (3) “[i]f a genuine ambiguity remains, moreover, the agency’s reading must still be ‘reasonable’”; and (4) “a court must make an independent inquiry into whether the character and context of the agency interpretation entitles it to controlling weight.”
Specifically, the Court found that the Court of Appeals erred when it concluded that the regulation was ambiguous simply because the parties had both made reasonable arguments that the plain language of the regulation supported their cases. In addition, the Court held that even if the regulation at issue in the case is ambiguous, the Court of Appeals “assumed too fast” that Auer deference should apply in this case. Rather, the Court noted that an assessment must be made as to whether the interpretation “is of the sort that Congress would want to receive deference.” The Court pointed to the Solicitor General’s statements made during oral argument regarding the lack of precedential value of VA Board decisions.
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Eversheds Sutherland Observation: Although state courts do not generally cite to Auer or Seminole Rock when conferring deference to state tax agencies’ interpretations of their own regulations, they often apply similar deference principles. While the Supreme Court declined to overturn Auer and Seminole Rock, its decision nonetheless places significant limitations on the application of the deference principle established by those cases. In particular, the Court’s admonition that, in order for deference to apply, an interpretation “must be the agency’s ‘authoritative’ or ‘official position,’ rather than any more ad hoc statement not reflecting the agency’s views,” may be particularly relevant in a state tax context where state tax agencies have sought deference to interpretations first advanced during litigation, and other “secret policies.”6
Additionally, Kisor may indicate the Court’s potential reexamination of the Chevron7 doctrine, which applies to administrative interpretations of ambiguous statutes. A number of Justices have questioned the continued application of Chevron, and some observers were looking to the Kisor decision as a barometer for the potential overturn or limiting of Chevron. The Court’s decision in Kisor may foreshadow a similar approach to Chevron, limiting, but not completely overturning, deference to agency interpretations of ambiguous statutes made via regulations. However, Chief Justice Roberts and Justice Kavanaugh, in each of their concurring opinions, underscore the fact that the Kisor opinion does not touch on deference to administrative interpretations of statutes enacted by Congress, leaving the door open for a different outcome regarding Chevron deference.
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Concurring opinions were written by Chief Justice Roberts as well as Justices Gorsuch and Kavanaugh. Justice Gorsuch’s lengthy concurring opinion, joined by Justice Thomas and in part by Justices Kavanaugh and Alito, disparages Auer deference for requiring “judges to accept an executive agency’s interpretation of its own regulations even when that interpretation doesn’t represent the best and fairest reading,” leading to “systematic bias in favor of the federal government, the most powerful of parties, and against everyone else.” Justice Gorsuch went on to note that the majority “cannot muster even five votes to say that Auer is lawful or wise,” referring to Chief Justice Roberts providing a fifth vote only with respect to the upholding of Auer on stare decisis grounds.
In arguing that Auer should be overturned, Justice Gorsuch advocated for a return to Skidmore8 deference, which requires courts to perform an independent analysis of an agency interpretation and “follow the agency’s view only to the extent it is persuasive.” With respect to the majority’s opinion in the case, Justice Gorsuch concludes that the opinion “leaves Auer so riddled with holes that, when all is said and done, courts may find that it does not constrain their independent judgment any more than Skidmore.” Finally, Justice Gorsuch predicts that the Kisor decision “hardly promises to be this Court’s last word on Auer.”
| Eversheds Sutherland Observation: Although the Kisor decision was unanimous as to its result, a significant number of justices would have gone further and abandoned Auer and Seminole Rock deference altogether. The four Justices who did not join any part of the majority opinion, Justices, Alito, Gorsuch, Kavanaugh, and Thomas, have all questioned the continued application of both Chevron and Auer deference. The movement to overturn or limit administrative deference has grown significantly in recent years, and is reflected by these four Justices in their concurring opinions. As noted by Justice Kavanaugh in his concurring opinion, a limiting or abandonment of agency deference will end the practice of putting “a thumb on the scale in favor of an agency.” In the words of Justice Kavanaugh, “[u]mpires in games at Wrigley Field do not defer to the Cubs manager’s in-game interpretation of Wrigley’s ground rules.” |
Implications for State Tax Controversies
Deference to administrative interpretations of ambiguous tax laws creates an uneven playing field for taxpayers challenging an assessment of tax or denial of a refund claim. The practice of administrative deference is particularly concerning in a tax controversy context, where state taxing agencies are enforcing the laws, writing the laws (via regulations and other means), and, when deference is applied, interpreting the laws with no independent judicial review. State tax agencies exist to collect revenue for the state, and it would be farfetched to assume that they are impartial in their interpretations of taxing statutes and regulations. While the Kisor Court’s limitation of Auer deference is a welcome development, concerns still remain regarding deference to state tax agency interpretations of state tax laws, whether those interpretations are in the form of regulations, administrative determinations, policy notices, or otherwise.
Some states have recognized the due process and separation of powers concerns created by this state of affairs and have affirmatively abandoned the practice of deference across the board.9
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1 No. 18-15, 588 U.S. ___ (2019).
2 519 U.S. 452 (1997).
3 325 U.S. 410 (1945).
4 For more background on the Kisor case, as well as a discussion of the impact of deference in state tax controversies, see Maria Todorova et al., "Tax Perspectives on Kisor v. Wilkie: Part l," Law360, Mar. 29, 2019; Todorova et al., "Tax Perspectives on Kisor v. Wilkie: Part 2," Law360, Apr. 1, 2019.
5 All of the Justices concurred with respect to the judgment, although 4 did not join any part of Justice Kagan’s majority opinion.
6See Sewon America, Inc. v. Riley, No. 1627180 (Ga. Tax Tribunal Jan. 24, 2017) (granting deference to an unknown interpretation despite the taxpayer’s argument that such deference amounted to an unpublished regulation).
7Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984) (establishing the principle of deference to administrative agencies’ interpretations of ambiguous statutes which the agency is tasked with administering).
8Skidmore v. Swift & Co., 323 U.S. 134 (1944).
9 In 2018, Arizona, Florida, Mississippi, and Wisconsin acted to abandon deference, through constitutional amendment, legislative action, or a State Supreme Court decision.
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