Adjudication/Judicial Review/Tax: Supreme Court January 11 Decision in Mayo Foundation v. United States

On January 11, the United States Supreme Court handed down its decision in Mayo Foundation v. United States. Mayo involved a challenge to a Treasury Department regulation providing that the services of full-time employees, which include employees normally scheduled to work 40 hours or more a week, are required to pay taxes under the Federal Income Contributions Act (FICA). The Mayo Foundation and other plaintiffs, which provided doctors in their residency programs with annual "stipends" of more than $40,000 as well as health insurance, malpractice insurance, and paid vacation time, challenged this regulation on the ground that its residents were exempt from taxation under section 3121 of the FICA and that the Treasury regulation was invalid.

Chief Justice Roberts, writing for the Court, held that the Treasury regulation was a permissible construction of section 3121. The Court began by applying the first step of the two-part framework in Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 842-43 (1984). It determined that Congress, in the FICA, had not "directly addressed the precise question at issue," as the FICA did not define the term student and did not otherwise address whether medical residents are subject to FICA. (Slip op. at 6.) Although neither the plain text of the statute nor the District Court's interpretation of the exemption spoke with sufficient precision to the issue, the Court determined that the appropriate standard, under the second step in Chevron, was whether the agency's answer is based on a permissible construction of the statute.

In so doing, the Court rejected the multi-factor analysis set forth in National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472 (1979) for evaluating an ambiguous provision of the Internal Revenue Code. Recognizing "the importance of maintaining a uniform approach to judicial review of admistrative action," Dickinson v. Zurko, 527 U.S. 150, 154 (1999), the Court saw "no reason why our review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as our review of other regulations." (Slip op. at 10.)

The Court concluded that Chevron and United States v. Mead Corp., 533 U.S. 218 (2001), rather than National Muffler and Rowan Cos. v. United States, 452 U.S. 247 (1981), "provide the appropriate framework for evaluating the full-time employee rule." (Slip op. at 11.) Applying that framework, it found that the rule "easily satisfies the second step of Chevron." (Slip op. at 12.)