Supreme Court strengthens power of interpretive Treasury regs.

• Author: Brandstetter, Patricia

The Supreme Court's decision in Mayo Foundation for Medical Education and Research, S. Ct. Dkt. No. 09-837 (U.S. 1/11/2011), clarified much of the existing uncertainty regarding the level of deference courts should grant to Treasury regulations interpreting the tax law.

The Mayo Case

In the Mayo decision, the Supreme Court determined the level of deference owed to an interpretive Treasury regulation, Regs. Sec. 31.3121(b)(10)-2(d)(3) (iii), under which persons who work 40 hours or more per week are treated as employees rather than students for purposes of the Federal Insurance Contributions Act (FICA). FICA imposes a tax on both employees and employers for wages earned performing services, with certain exceptions like the student exemption under Sec. 3121(b)(10) for services performed in the employ of a school, college, university, or similar organization, "if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university."

The Mayo Foundation sought a refund of FICA taxes paid on behalf of doctors who have graduated from medical school and attend Mayo's residency programs for additional instruction in their chosen specialty. The residents receive annual "stipends" of over $40,000, are required to take written examinations, and spend roughly 50-80 hours a week in a "clinical setting, where they learn by caring for patients in a medical specialty under the supervision of a faculty member."

Mayo argued that the term "student" for purposes of the statutory exemption plainly encompasses medical residents and that, in any event, the categorical exclusion in the regulation of employees working more than 40 hours a week without regard to the educational component of the work is an unreasonable interpretation of the law.

Background

Certain regulations issued by Treasury are based on specific grants of authority in the Internal Revenue Code; one example is Sec. 1502, which authorizes the Treasury secretary to issue consolidated return regulations. More common than such legislative regulations, however, are interpretive regulations promulgated under the Sec. 7805(a) grant of general authority to the Treasury secretary to "prescribe all needful rules and regulations for enforcement" of the Code. Courts generally attach great weight, and thus often defer, to Treasury's interpretation of the Code, but both the Supreme Court and the Tax Court have stated that an interpretive regulation under...