Tax Law

Mayo Intensifies Treasury Reg Authority

The U.S. Supreme Court's recent decision in Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704, 178 L. Ed. 2d 588, 2011 U.S. Lexis 609 (2011), provided guidance, after several decades of litigation, on the degree of deference afforded to agency rules in general and Treasury regulations specifically. The Court held that the proper standard is the highly deferential Chevron standard, rather than the less deferential National Muffler standard.

The standard enunciated in Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (U.S. 1984) utilized a two-part test in evaluating the degree of deference to be given to agency rules. First, a court is to determine whether Congress directly addressed the precise issue. If so, the court, and the agency, must give effect to the unambiguously expressed intent of Congress. If Congress has not directly addressed that precise issue, regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Thus, a court may not substitute its own construction of a statutory provision for the agency's reasonable interpretation of the statute.

In contrast, the standard articulated by the Supreme Court in Nat'l Muffler Dealers Ass'n v. United States, 440 U.S. 472 (U.S. 1979) considers multiple factors in determining whether to defer to an agency's interpretation of a statute. These factors include:

  • Whether the regulation was substantially contemporaneous with the statute;
  • The length of time the regulation has been in effect;
  • The reliance placed on the regulation;
  • The consistency of the agency's interpretation; and
  • The degree of scrutiny exercised by Congress in subsequent statutory re-enactments.

The National Muffler standard therefore affords significantly less deference to the agency's interpretation of the statute than the Chevron standard.

In Mayo, the Supreme Court acknowledged that it had previously cited both Chevron and National Muffler in reviewing Treasury regulations. However, the Court concluded that there is no justification for applying a less deferential standard of review to Treasury regulations than is applied to interpretations of other agencies. As a result, the Court held unanimously that the principles of Chevron apply with full force in the tax context.

This decision could have far-reaching impacts, but there are still open issues. For example, in Mayo, the Court was dealing with a final regulation, but does the same highly deferential standard apply to the frequently issued temporary regulations? There are several other cases presently working their way through the court system dealing with this and other issues. Practitioners should keep a vigilant watch on this important line of authorities, as it could have far-reaching impacts on the practice of tax law.


RELATED LINKS: For further insights on the Mayo decision, see:

  • Mayo and the Future of Tax Regulations  by Steve R. Johnson for TaxAnalysts® - Steve R. Johnson is the the E.L. Wiegand Professor with the William S. Boyd School of Law at the University of Nevada, Las Vegas.


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