Mayo Foundation for Medical Education and Research v. United States, 562 U.S. _____, 131 S. Ct. 704; 178 L. Ed. 2d 588 (2011), decided by the Supreme Court last January 11, is the most important elaboration upon Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984) that has occurred within the 27 years of Chevron's existence. Whether federal regulations are valid or not has long been tested by the standard set out in the Chevron case (although how Chevron applied to tax regulations was not completely settled). 

Mayo is troubling because it interprets Chevron in a markedly pro-agency way — in at least two major respects:

• Mayo takes an approach that makes it difficult to show that a regulation runs afoul of the plain text of the enacted statute (underChevron "step one"); and

• Mayo allows an agency promulgating a regulation to rely, under Chevron step two, on administrative convenience as a justification for the regulation — even when the agency expressly admits that an administratively convenient, bright-line rule will sometimes yield a result that is incorrect and that reflects a detriment to the taxpayer that is very substantial.

The federal government, unsurprisingly, is now citing Mayo as the basis for a new and broader authority for issuing federal regulations.

There are, however, at least two non-obvious strategies for limiting Mayo:

• When the agency has used administrative convenience as a justification for drawing a bright line that you believe overreaches, brainstorm to identify a situation that (a) is within the category encompassed by the bright-line, and (b) contradicts, or comes close to contradicting, some statute (not necessarily the one that regulation was designed to interpret), regulation, or judicial doctrine. The situation you identify would not necessarily have to be your situation.   The agency should not be able to have it both ways: invoking administrative convenience because of the government effort required to dispose of a burdensome category of situations, while at the same time arguing that a person challenging the regulation has standing to invoke only her own situation; and   
   
• Identify a constitutional provision (other than due process and not the non-delegation doctrine, each of which are typically non-starters) with which the regulation is in some significant tension. There are venerable rules of statutory construction, often overlooked, that direct courts to avoid constructions of a statute that raise significant constitutional questions. Under these rules of construction, Chevron shouldn't apply at all, or should have a sharply limited, secondary role, when the regulation raises significant constitutional questions.  Again, some basic "Con Law 101" brainstorming might allow one to completely sidestep Chevron deference.

Real-world examples of how these two non-obvious strategies might be used are discussed in our recently published BNA Daily Tax Report article, The ‘Mayo’ Decision’s Problematic Tax Analysis, which may be found at http://www.gtlaw.com/NewsEvents/Publications/PublishedArticles?find=148637.

In addition, several additional strategies are suggested by the following statement in Mayo (slip op. at 12, citations and emphasis omitted):

We have explained that “the ultimate question is whether Congress would have intended, and expected, courts to treat [the regulation] as within, or outside, its delegation to the agency of ‘gap-filling’ authority.” In the Long Island Care case, we found that Chevron provided the appropriate standard of review “[w]here an agency rule sets forth important individual rights and duties, where the agency focuses fully and directly upon the issue, where the agency uses full notice-and-comment procedures to promulgate a rule, [and] where the resulting rule falls within the statutory grant of authority.”

• First, the preamble to the regulations, issued along with the proposed, temporary, or final regulations, should be examined to determine the agency’s stated reasons for issuing the regulations. Mayo conducted its Chevron “step two” review by examining each of the Treasury Department’s stated reasons to see whether they, together, provide a reasonable justification for the regulation.  Given Mayo’s emphasis upon whether “the agency focuses fully and directly upon the issue,” it appears that the Court is inclined, in considering whether a regulation meets step two of Chevron, to take into account only those reasons that an agency offered at the time it issued the regulation;  

• Second, Mayo strongly suggests that a regulation may not be entitled to Chevron deference unless it was issued after notice and comment; and,

• Third, the statutory grant of authority for the regulation should be examined to determine whether the regulation is authorized and consistent.    

Anyone interested in understanding how to limit the reach of Chevron as “turbocharged” by Mayo should consider these and other points, and should, in addition, attempt to understand the underlying substantive tax issues addressed by Mayo. Again, the BNA article is useful on these points.