Summary

In Mayo Foundation v. United States ("Mayo"), the Supreme Court adopted a deferential standard for review of Treasury regulations when interpreting ambiguous provisions of the Code.

Extended Summary

In ruling that medical residents are not "students" exempt from FICA taxation, the Court:

• endorsed the standard of review set forth in Chevron v. Natural Resources Defense Council, a 1984 Supreme Court decision, which requires a court in considering the validity of an agency regulation to defer to a reasonable interpretation of the statute, where the statute is ambiguous; and
• rejected the analysis set forth in National Muffler Dealers Association v. United States, a 1979 Supreme Court decision, under which a court might invalidate a regulation where the agency's interpretation of the statute had been inconsistent over time, or where the regulation was promulgated long after the statute was enacted or specifically in response to contrary court decisions.

Chevron requires a two-fold analysis of a regulation in question: first, a court must ask if Congress directly addressed the precise question at issue. Assuming Congress failed to do so, as a second step the court must determine if the agency rule is "arbitrary or capricious in substance, or manifestly contrary to the statute." If not, the Court conclusively (8-0) held that the agency rule must be upheld.

The Court went even further, however, and stated that it made no difference whether "Congress's delegation of authority was general or specific." It held within the tax context that the authority granted by Section 7805(a) to "prescribe all needful rules and regulations for the enforcement" of the Code was adequate authority, and no greater specificity was required.

CPC Commentary

Mayo is important to the charitable tax planner. First, it clearly stated the deference granted by the Supreme Court in Chevron to regulations of government agencies applies "with full force in the tax context." Second, the case made it clear that a Treasury regulation, which embodies a "reasonable" interpretation of an ambiguous statute, is to be given deference where it conflicts with prior court decisions or prior guidance from Treasury itself, even where the regulation is adopted specifically to bootstrap the government's argument in pending litigation.

It should be noted that the Court did state that such regulations are subject to notice-and-comment procedures, which it considered to be "a significant sign that a rule merits Chevron deference." Presumably, a public hearing that roundly criticized a regulation would be an important consideration for a court.

In short, this decision is likely to be very far-reaching, and may well have changed "interpretive" regulations into "legislative" regulations, that is, regulations that have the power and authority of a statute.

Update:

Tax Analysts reported Clarissa Potter, a deputy associate in the technical section of the Chief Counsel's office, spoke at a meeting of the ABA Taxation Section on January 21, 2011, commenting that Mayo would speed up the process of developing and issuing formal regulatory guidance. She highlighted the Court's statement that a simple "bright line" rule, though "not perfect," may often be a reasonable mechanism for interpreting complexities in the Code. As a result, Ms. Potter anticipated that the agency may be able to move more quickly in proposing and finalizing formal guidance. Ms. Potter noted the Court's emphasis on the importance of notice and comment in the regulatory process, but said it "may take some time" to integrate the policy implications of this aspect of the decision throughout the agency.

Reporting from another session at the same conference, Tax Analysts quoted acting deputy assistant attorney general Gilbert Rothenberg as saying legislative history is no longer relevant after Mayo to the threshold question whether the language of a Code provision is ambiguous. Mr. Rothenberg also asserted that Revenue Rulings should be accorded Chevron deference, even though they are not adopted through a process of notice and comment.

As of yet, we do not have access to a full text of Ms. Potter's or Mr. Rothenberg's remarks, but we suggest that Mayo entirely hinges on the fact that the regulations in question were adopted only after notice and comment, and we also suggest Mr. Rothenberg's extension of the scope of the Court's decision to revenue rulings is a significant reach. Under Mr. Rothenberg’s view, because legislative history is not relevant to ambiguous legislation, and because revenue rulings do not go through the process of public comment and scrutiny before becoming "law," the IRS has a blank check to do whatever it pleases. Is this what the Court meant in Mayo?!

National Taxpayer Advocate Nina Olson shares our concerns about the Service’s interpretation of Mayo. TaxAnalysts reported, in a January 25 speech at the 2011 Tax Institute, Ms. Olsen opined the IRS should not be given “unfettered discretion,” and intends to address this with Congress in her next annual report. "People rue the day that Congress micromanages the IRS, but if it is not a responsible steward of the great authority and responsibility that it has, then it should be micromanaged," Ms. Olsen stated.

Relevant Documents

	USSC 562 U. S. __ (2011): Mayo Foundation for Medical Ed. and Research v. United States	1/11/11
	USSC 467 U.S. 837: CHEVRON, U.S.A., INC., Petitioner, v. NATURAL RESOURCES DEFENSE COUNCIL, INC., et al. AMERICAN IRON AND STEEL INSTITUTE, et al., Petitioners, v. NATURAL RESOURCES DEFENSE COUNCIL, INC., et al. William D. RUCKELSHAUS, Administrator, Envir	7/18/08
	USSC 440 U.S. 472: NATIONAL MUFFLER DEALERS ASSOCIATION, INC., Petitioner, v. UNITED STATES.	7/18/08
	Section 7805: Rules and regulations	3/24/10