Economic Indicators
The U.S. Supreme Court’s recent decision overturning the Chevron doctrine is set to disrupt the regulatory state. As the impact of the ruling begins to take shape, investors will want to keep a keen eye on its implications for tax strategy. I believe some companies should now have a better chance at lowering their tax rates through aggressive tax strategies, as U.S. government agencies will be less empowered to interpret and enforce the law.
The 1984 Chevron case, for which the doctrine was named, allowed U.S. government agencies to interpret ambiguous rules and laws enacted by Congress, and the courts would follow their decisions. This meant the Internal Revenue Service (IRS) could make its own determinations on issues related to tax law.
With that overturned, if Congress does not explicitly delegate authority to the IRS in a tax law, judges can interpret cases themselves, rather than deferring to agency interpretations or administrative cases. While courts could still align with the IRS, especially if a case pertains to parts of the tax code with solid legislative history, a judge’s interpretation will no longer need to agree with the agency’s interpretation.
As such, agencies will lose some of the flexibility they currently have to regulate issues within their jurisdiction. For any major new issue, Congress will have to act first. As a result, I believe companies are now more likely to engage in lengthy litigation and have a better chance at prevailing in court in tax challenges brought by the IRS.
The three most significant potential tax outcomes to watch are:
Companies with aggressive tax positions could benefit from Supreme Court ruling
Source: CapitalIQ. Data as of 6/30/2024. The bar chart displays S&P 500 Index companies with the highest unrecognized tax benefits as a percentage of total market cap.
Overall, the U.S. Supreme Court's decision to overturn the Chevron doctrine will likely have wide-reaching consequences beyond tax law. In addition to the IRS, the Securities and Exchange Commission, the Environmental Protection Agency and other regulators will be similarly impacted. Limiting the deference shown to government agencies, could result in broadly looser regulatory standards, which may benefit companies’ bottom lines and investors’ portfolios.
S&P 500 Index is a market-capitalization-weighted index based on the results of 500 widely held common stocks.
Don't miss our latest insights.
Economic Indicators
U.S. Equities
Long-Term Investing
Market Volatility
RELATED INSIGHTS
Economic Indicators
Get the Capital Ideas newsletter in your inbox every other week