The U.S. Supreme Court ruled recently that Treasury Regulations
should be reviewed under the same standard that applies to non-tax
regulations and not a stricter multiple-factor test long thought to
apply. As a result of this decision taxpayers will face far greater
difficulty successfully challenging a Treasury Regulation in court.
In particular, the decision eliminates the relevance of the history
and context of the promulgation of the regulation and instead
focuses solely on its reasonableness.
In Mayo Foundation for Medical Education and Research v.
United States,1 the U.S. Supreme Court
considered the validity of Treasury Regulation §
31.3121(b)(10)-2(d)(3), an employment tax regulation known as the
"full-time employee rule". The full-time employee rule
provides that a statutory exemption for employment taxes applicable
to services performed in the employ of a school, college,
university, or similar organization "by a student who is
enrolled and regularly attending classes at such school, college,
or university" does not apply to full-time employees and that
students whose normal work schedule is 40 hours or more per week
are full-time employees. Treasury enacted this regulation in the
face of more than 7,000 refund claims for employment taxes paid on
medical resident wages following a 1998 decision by the Court of
Appeals for the Eighth Circuit, which held that medical residents
could not be categorically excluded from student status under the
Social Security Act.2 Mayo sued for a refund of
employment taxes paid on services of its medical residents and
challenged the full-time employee rule as an invalid exercise of
The District Court ruled in favor of Mayo and held that Treasury
Regulation § 31.3121(b)(10)-2(d)(3) was invalid because it was
inconsistent with the unambiguous text of the statute. The District
Court also analyzed the validity of the regulation under a factor
test set forth in National Muffler Dealers Assn., Inc., v.
U.S.3 Under National Muffler, a
Treasury Regulation is evaluated by considering the length of time
between the enactment of the statute and the promulgation of the
Treasury Regulation, the length of time the Treasury Regulation has
been in place, reliance placed on the Treasury Regulation by
taxpayers, and other factors.
The Court of Appeals reversed, applying the test set forth in
Chevron U.S.A. Inc. v. Natural Resource Defense
Council, Inc., which courts have used to determine the
validity of non-tax regulations.4 Under the
Chevron test, if Congress has not unambiguously addressed
the question at issue, deference is given to an administrative
agency's interpretation of a statute as long as that
interpretation is reasonable.
The Supreme Court applied the first step of the Chevron
framework and determined that Congress had not directly addressed
the precise question at issue, i.e., whether employees working
full-time could qualify for the student exemption. Finding that the
term "student" used in the statute was ambiguous, the
Court then applied the second step in the Chevron test --
determining whether the Treasury Regulation was a reasonable
interpretation of the text -- and found that the regulation was
Importantly, the Supreme Court explicitly rejected application of
the National Muffler standard. In addressing why it
applied Chevron deference instead of the National
Muffler multi-factor test, the Court held that the
Chevron test was applicable whenever Congress appeared to
have delegated authority to an agency to make rules carrying the
force of law, whether that delegation of authority was explicit of
under a general grant of authority such as § 7805(a) of the
Internal Revenue Code, which allows Treasury to "prescribe all
needful rules and regulations for enforcement" of the Code.
The Court found that "the administrative landscape has changed
significantly" since it decided National Muffler and
that Congress would have intended the general grant of authority
under § 7805(a) to permit Treasury to issue gap-filling
regulations such as the full-time employee rule.
1.No. 09-837 (Jan. 11, 2011).
2.Minnesota v. Apfel, 151 F.3d 742 (8th Cir.
1998); 42 U.S.C. § 410(a)(10). The Social Security
Administration attempted to exclude medical residents from a
student exemption in the Social Security Act by issuing Social
Security Ruling 78-3. The Court of Appeals held that the ruling was
not entitled to deference and was erroneous because it was
inconsistent with the Social Security Administration regulations at
20 C.F.R. § 404.1028(c), which contemplate a case-by-case
examination to determine if an individual's relationship with a
school is primarily for educational purposes or primarily to earn a
3.440 U.S. 472 (1979).
4.467 U.S. 837 (1984).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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