From Muffler to Mayo: The Supreme Court’s Decision to Apply Chevron to Treasury Regulations and Its Impact on Taxpayers

MICHAEL HALL*

I. Introduction

In 1969, the Supreme Court announced that Treasury
“[r]egulations ‘must be sustained unless unreasonable.’” Until the Supreme Court’s recent decision in Mayo Foundation for Medical Education and Research v. Commissioner, the question remained as to how to determine when these regulations were “unreasonable.” Though on the surface the dispute in Mayo centered on a FICA tax exception, the case became a platform for resolving the dispute after nearly a quarter of a century of debate among commentators and courts alike. In Mayo, the Court decisively proclaimed that the Chevron two-step analysis would apply to general authority tax regulations issued pursuant to section 7805(a) of the Code.

Though controversial, the decision to apply the Chevron standard to these regulations promulgated by the Treasury is justifiable for three main reasons: the need for consistency and uniformity of treatment for taxpayers, the need for flexibility to foster administrability, and the expertise of the Service. As the Court made clear in Mayo, each of these justifications has regularly been used to warrant application of the Chevron standard to decisions of agencies other than the Treasury and the Service, but each is equally as valid in the tax context. Yet the decision to apply the Chevron two-step to section 7805(a) regulations comes with potential drawbacks for taxpayers, who will now face a greater task in challenging interpretations of the Code made by the Treasury. Part II of this Note provides a historical context in which to analyze the Court’s decision and Part III summarizes the Court’s holding in Mayo. Part IV explains why the Court’s decision to apply Chevron in this context was justifiable because of the need for uniformity, the need to maintain flexibility for the Treasury so they may effectively administer the Code, and the expertise of the Treasury in administering a complex statutory scheme. Part V explores the impact the Chevron analysis may have on the adjudication of section 7805(a) Treasury regulations. Finally, Part VI briefly concludes the discussion.

* The author would like to thank Albert Lauber, the Director of Graduate Programs in Taxation at Georgetown University Law Center, and Ira Mirsky, a partner at McDermott Will & Emery LLP, for their mentorship during this process. All opinions are the author’s own.

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Spring 2012 The Tax Lawyer Hall

NOTE

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