On January 11, 2011, the U.S. Supreme Court unanimously upheld Treasury regulations interpreting the “service by a student” exclusion to the definition of “employment” for FICA purposes. Mayo Found. for Medical Education and Research v. United States, No. 09-837. In reaching its decision, the Court applied the two-step deference standard set forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), rather than the multi-factor analysis set forth in National Muffler Dealers Assn., Inc. v. United States, 440 U.S. 472 (1979). Prior to Mayo, the lower courts had been in disagreement as to which standard should be applied in testing the validity of “interpretive” Treasury regulations.

Under Chevron’s two-step approach to testing the validity of a regulation, “step one” requires the court to determine whether “Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter.” 467 U.S. at 842-43. If the court determines that the statute has not unambiguously addressed the precise question at issue, “step two” requires the court to determine “whether the regulation is based on a permissible construction of the statute.” Id.

By contrast, under National Muffler, after determining that the statute was unclear, a court would look to “whether the regulation harmonizes with the plain language of the statute, its origin, and its purpose.” 440 U.S. at 477. In testing the validity of an interpretive regulation, National Muffler would take into consideration such factors as whether a regulation was issued contemporaneously with the statute, the length of time the regulation has been in effect, the reliance placed on it, the consistency of the IRS interpretation, and the degree of scrutiny devoted to the regulation by Congress. Id.

In many cases, the conclusion reached would be the same under both approaches, but in some cases it would diverge.