On June 28, 2024, the US Supreme Court overturned its 40-year-old precedent concerning deference (often referred to as “Chevron deference”) given to a federal agency’s interpretation of a statute in Loper Bright Enterprises, et. al., v. Gina Raimondo, No. 22-451 (S. Ct. 2024). Since the issuance of the Loper Bright opinion, tax professionals have been speculating as to the impact of the opinion. For example, see our email blast on July 2, 2024.
Exhibit 2 from the 2022 Tax Forum was a simplified version of the facts in the case of Tribune Media Co., et al. v. Commissioner, TC Memo 2021-122 (Oct. 26, 2021), which involved the sale of the Chicago Cubs to the Ricketts family. Unlike the senior debt, the junior debt was determined by the court to be equity and, therefore, treated as additional sale consideration rather than a debt-financed distribution under Reg. §1.707-5(b) (that is not tainted by the disguised sale rules). One of the issues in Tribune Media, now pending in the Seventh Circuit Court of Appeals, is the “general” partnership anti-abuse rule of Reg. §1.701-2, which is the topic of today’s email.
On July 3, 2024, counsel for Tribune Media submitted a letter to the Seventh Circuit Court of Appeals about the impact of Loper Bright on the validity of the partnership anti-abuse rule of Reg. §1.701-2. In the letter, counsel claimed that the regulation is an “extraordinarily broad assertion of agency authority,” and that “the agency [i.e., Treasury] even contends that it can invalidate a transaction that follows ‘the literal words’ of a statute that Congress enacted.” Counsel reiterated that “Loper Bright confirms that this Court should scrutinize [Treasury’s] assertion of authority carefully to ensure that the agency stayed within permissible statutory bounds.”
The IRS countered a week later, filing a letter with the Seventh Circuit in which it argued that the partnership anti-abuse regulation is grounded in established tax-abuse precedent. The IRS’s response asserted that the partnership anti-abuse rule can be directly traced to the historic case of Gregory v. Helvering, 293 U.S. 465, 467-70 (1935). (Gregory involved a reorganization where all the technical requirements were met, but the transaction “was without substance and must be disregarded.”) The IRS argued further that the partnership anti-abuse rule is consistent with the business purpose requirement of Reg. §1.701-2(a)(1) as well as the codification of the economic substance doctrine in §7701(o). Finally, the IRS asserted that Reg. §1.701-2 fits within the regulatory framework of what is now §7805(a), the statute by which Treasury is authorized to prescribe all rules and regulations for enforcing the Internal Revenue Code.
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