In Chevron the court wrote, “… if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.”
The Chevron doctrine, derived from this case, is a framework for courts to determine the level of deference to be given to federal agency interpretations of statutes. The doctrine's two-step analysis is:
- The court determines whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, the court and the agency must give effect to that intent.
- If the court finds that Congress has not directly addressed the issue, it must determine whether the agency's interpretation is based on a permissible construction of the statute. The court should defer to the agency's interpretation if it is reasonable.
Other Applications of the Chevron Doctrine
Various applications of the Chevron doctrine have shaped the deference given to federal agencies' interpretations of statutes. An example case in the tax context is Mayo Foundation.
Mayo Foundation for Medical Education and Research v. United States
This 2011 case involved a dispute over whether Mayo’s medical residents at its university hospital medical clinic were exempt from Federal Insurance Contribution Act (FICA) taxes under a specific provision of the Internal Revenue Code (IRC).
Mayo residents took part in a formal and structured educational program and had written exams. This program provided residents additional education in a specialty to become board certified in that field. The residents typically cared for patients, examining and diagnosing them 50–80 hours a week supervised by senior residents and faculty members.
IRC section 3121(b)(10) in general provides an exemption from FICA taxable employment for services performed in the employment of a school, college, or university, if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.
Treasury’s regulations administrating this section of the IRC provide that the services of a full-time employee are not incident to and for the purpose of pursuing a course of study. Therefore, an employee whose normal work schedule is 40 hours or more per week is considered a full-time employee, “the full-time employee rule”. Under this regulation, a full-time employee resident’s service is “not incident to and for the purpose of pursuing a course of study,” and accordingly, a Mayo medical resident is not an exempt student under IRC section 3121(b)(10).
The Supreme Court concluded that the principles underlying Chevron apply in the tax context and that the Treasury's regulation, which denied the exemption, was a reasonable interpretation of the statute.
This decision allowed the US Treasury to exercise its authority under Chevron in writing tax regulations interpreting and implementing the IRC. The outcome of Loper Bright may have implications for taxpayers considering challenging to the Treasury’s interpretation of the IRC.
How impactful this case will be in limiting the power of the Treasury in writing regulations remains to be seen. The Loper Bright decision could affect, for example, Treasury’s 2021 Section 199A regulations applicable to agricultural cooperatives. These regulations placed restrictions on the extent to which a cooperative’s earnings qualify for the Section 199A(g) domestic production activities deduction, where the statute and legislative history placed no such restrictions. A favorable outcome in Loper Bright may provide some impetus for Treasury to revisit its Section 199A regulations applicable to agricultural cooperatives.
A Supreme Court decision in Loper Bright should emerge by the end of the court’s current term in June.
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For more guidance on the effects of the Loper Bright case or help navigating changes to Treasury regulations, contact your Moss Adams professional.
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