In more detail

In both YA Global (161 TC No. 11) and Schwarz (T.C. Memo 2024-55), the taxpayers filed the motion for reconsideration under Tax Court Rule 161 after the 30-day window provided in the rule had expired, which meant that the Tax Court had broad discretion whether to grant the motions. We discuss the Tax Court's reasoning for denying YA Global's motion and granting Schwarz's motion, below.

YA Global

In the original YA Global case, the taxpayer argued that its withholding tax liability should be reduced by non-partnership deductions of the non-US partners under Treas. Reg. §1.1446-3. The Tax Court rejected this as a circular argument, holding that the non-US partner's non-partnership deductions had no bearing on YA Global's withholding tax liability. Accordingly, the Tax Court found that YA Global, an offshore fund, was engaged in a US trade or business and owed withholding tax on the effectively connected income (ECI) allocated to its non-US partners. We discussed this decision in our previous client alert, Tax Court says Cayman hedge fund engaged in US trade or business.

Months later, YA Global asked the Tax Court to reconsider its conclusion on whether non-partnership deductions could offset YA Global's withholding tax liability. In its motion for reconsideration, YA Global argued that the Supreme Court's decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2025) constituted an intervening change in controlling law insofar as it overturned Chevron. After Loper Bright, courts no longer defer to agency regulations, and instead determine the best interpretation of the statute by exhausting the traditional tools of statutory construction. The original YA Global opinion did not cite Chevron, but Judge Halpern acknowledged Chevron could nonetheless have been implicit controlling law if the Tax Court had reached its conclusion by relying on a construction of a Code provision adopted by Treasury which would not have been adopted in the absence of Treasury's interpretation.

Although the taxpayer claimed that, in the original opinion, the Court relied solely on Reg. § 1.1446-3(e) and Reg. § 1.1446-6, the Court found this argument to be insufficient. The Tax Court explained that its rejection of the taxpayer's argument in the original YA Global case was not due to Treasury's interpretation of Section 1446 but was based on the Court's evaluation of the taxpayer's argument. Accordingly, the taxpayers did not demonstrate that Loper Bright was an intervening change in controlling law. The Tax Court indicated that a challenge under Loper Bright might have been more persuasive if the taxpayer could have shown that the underlying withholding regulation under Reg. §1.1446-3(e) was valid under Chevron but not under Loper Bright.

Take away ─ protective filings

The Tax Court's denial of YA Global's motion for reconsideration reminds us of the question the original decision raised. "What is the right amount of proactive protective actions for taxpayers?" Protective actions can be valuable. This can extend to non-US taxpayers filing protective returns where there is a risk of engaging in a US trade or business or protective section 475 identifications. Making a protective certification of non-partnership deductions may have mitigated some of withholding tax liability. This is more food for thought for funds with non-US partners and ECI risk.

Schwarz

In Schwarz, the taxpayers claimed that their ranching and real estate activities were a single activity for purposes of Section 183. In its original opinion, the Tax Court ruled that the ranching and real estate activities were separate activities pursuant to Reg, §1.183-1(d)(1), and that taking into account facts and circumstances relevant to the factors under Reg. §1.183-2(b), the taxpayers did not have an "actual and honest profit objective" with respect to these activities. As in YA Global, the taxpayers in Schwarz did not challenge the validity of any regulations in the original case.

Judge Goeke emphasized that the taxpayer's prior pursuit of a validity challenge was not a condition precedent to reconsideration and agreed to reconsider the court's opinion in Schwarz because the original opinion relied extensively on Treasury's interpretation of section 183. The court cited several factors in granting reconsideration:

• The parties' original filings 
• The original issues in this case 
• The relevant law
• The fact that Chevron was clearly implicit controlling law at the time the opinion was issued
• The fact that the opinion extensively relied on Reg, §1.183-1(d)(1) and §1.183-2(b), which will be challenged as invalid under reconsideration.

In addition, the court determined that the taxpayer's motion in Schwarz is timely despite the release of Loper Bright after the expiration of the 30-day period for filing a motion for reconsideration. Note, however, that Judge Goeke referenced the ongoing Rule 155 computations in this case when addressing timeliness.

Finally, the order in Schwarz provides instructions to the parties for future filings that may be instructive to those addressing any post-Loper Bright arguments. The Tax Court instructed the parties to address the following issues:

• Relevant case law regarding deference to regulations 
• Delegation of regulatory authority under section 183
• If any portion of the regulations is found to be invalid, how the court should evaluate the facts of the case and whether there would be any effect on the outcome. 

Conclusion

The recent Tax Court orders in YA Global and Schwarz highlight the centrality of Loper Bright not only for current and future tax matters, but for past or decided matters. Taxpayers that did not initially challenge the validity of a regulation may nonetheless have an opportunity to raise such a challenge through a timely and well plead motion for reconsideration. Taxpayers should monitor the rapidly developing landscape of challenges to Treasury Regulations after the Loper Bright decision as they pursue both planning and controversy matters.