Page 3 - Altera: Why the Government Can't Count on Chevron Step Two

treated like interpretations in policy statements, agency manuals, and enforcement guidelines.14
The Court in Mead focused on its prior decision in Skidmore.15 If the Chevron doctrine doesn’t apply and the issue before the court is one in which the agency has special knowledge and expertise (which is frequently the case), the court should determine whether the agency’s interpretation is persuasive given the various contexts in which the ruling may be applied and has been applied by the agency.16 This is referred to as Skidmore deference.
As discussed below regarding King,17 perhaps another label should be added for situations in which the courts are given exclusive power to resolve an issue of statutory interpretation for which neither Chevron nor Skidmore deference ap- plies.
B. The Chevron Doctrine in Recent Supreme Court Tax Cases
1. Mayo (2011). In Mayo,18 the Supreme Court invoked Chevron step two to uphold a revised regulation that excluded medical students from the student FICA exception of section 3121(b)(10). The Court found the regulation to be a permissible interpretation in light of the statute’s ambiguity in application of the student exception to medical residents.
Section 3121(b)(10) applies to services performed in the employ of a school, college, or university by a student enrolled and regularly attending classes at that institution. In 1998 the Eighth Circuit in Apfel19 held that medical residents qualified as students under section 3121(b)(10). That decision led to sev- eral thousand refund claims from medical institu- tions. In the ensuing refund litigation, courts issued conflicting decisions on whether medical residents were per se ineligible for the student exception, as the government contended.
Following notice and comment procedures, Trea- sury in 2005 promulgated reg. section 31.3121(b)(10)-2(d) to ‘‘clarify’’ the definition of
14See Lisa Schultz Bressman, ‘‘How Mead Has Muddled Judicial Review of Agency Action,’’ 58 Vand. L. Rev. 1443, 1457-1474 (2005).
15Skidmore v. Swift & Co., 323 U.S. 134 (1944).
16Mead further held that when Congress has made an express delegation of authority to an agency to issue rules binding on future parties, congressional intent to delegate interpretative authority to the agency is also present. However, when that express delegation is absent or unclear, the courts must decide whether Congress intended for the agency to have authority to carry the force of law.
17King v. Burwell, 135 S. Ct. 2480 (2015).
18Mayo, 131 S. Ct. 704 (2011), aff’g 568 F.3d 675 (8th Cir. 2009), rev’g 503 F. Supp.2d 1165 (D. Min. 2008).
19Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998). TAX NOTES, June 6, 2016
student for FICA purposes. The regulation adopted a facts and circumstances approach for determining whether particular services qualify for the student FICA exception. In defining student, the regulation set forth a general rule that a student who normally works more than 40 hours a week and whose services are incident to the pursuit of a course of study is considered a full-time employee. An ex- ample specifically applied the rule to medical resi- dents.
The Mayo Foundation challenged the new regu- lation, and the district court granted it summary judgment. Applying the multifactor test in National Muffler,20 the trial court found that the regulation was inconsistent with the unambiguous language of section 3121, which requires that an employee be treated as a student as long as the educational aspect predominates over the service aspect of the relationship with the employer. The Eighth Circuit reversed, holding that the regulation was valid and entitled to Chevron deference.
On appeal to the Supreme Court, the Mayo Foundation asserted that National Muffler, rather than Chevron, should be the proper standard of review since the ambiguous statute was in title 26. It used this ‘‘tax exceptionalism’’ concept to argue that Treasury regulations should be subject to a less deferential standard of review than regulations issued by other agencies. The Supreme Court re- jected that approach, holding instead that the Chev- ron tests apply with full vigor to regulations issued under title 26.
Further, the Court concluded that the Mead in- quiry — whether a regulation was properly issued under the agency’s rulemaking authority — applies to both general (interpretative) and specific (legis- lative) grants of authority.21
2. Home Concrete (2012). At issue in Home Concrete22 was a Treasury regulation that allowed the six-year statute of limitations under section 6501(e)(1)(A) to apply not only when there is a greater than 25 percent omission in gross income stated on the taxpayer’s return but also when that understate- ment results from an overstated basis. The tax due from the taxpayer was assessed more than three years but less than six years from the due date of the return. The government argued that the six-year period applied and that the assessment was there- fore valid because the taxpayer omitted more than
20National Muffler Dealers Association Inc. v. United States, 440 U.S. 472 (1979).
21See section 7805(a).
22United States v. Home Concrete & Supply LLC, 132 S. Ct. 1836 (2012), aff’g 634 F.3d 249 (4th Cir. 2011), rev’g 599 F. Supp.2d 678 (E.D.N.C. 2008).
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COMMENTARY / SPECIAL REPORT