Mayo Foundation Oral Argument Tilts Towards the Government and Raises Doubts About the Continuing Vitality of National Muffler Dealers

At oral argument on November 8, several Supreme Court Justices expressed skepticism regarding the claim that medical residents fall within the “student exemption” from FICA taxation.  Although it is always hazardous to predict the outcome of a case from the questions asked at oral argument, it is difficult to envision the taxpayer getting the five votes needed to overturn the court of appeals’ rejection of the exemption.

The Justices’ objections to the taxpayer’s position came from a variety of angles.  Justice Sotomayor focused on the essence of what a medical resident does, suggesting that a person working unsupervised for more … Read More

Government Argues for Abandoning the Muffler Dealers Test for Deference to IRS Regulations

In our initial post on the Mayo Foundation case pending in the Supreme Court, which concerns whether medical residents are exempt from FICA taxation, we noted that the case potentially raised a broad question that has surfaced in the courts of appeals and the Tax Court in recent years – namely, whether Chevron deference principles have supplanted the traditional Muffler Dealers approach to analyzing the deference owed to Treasury regulations.  Although that issue was not flagged by the parties at the certiorari stage, we later observed that the taxpayers’ opening merits brief served that ball into the government’s court by relying heavily on some … Read More

Mayo Foundation Oral Argument Scheduled for November 8

The Supreme Court has released the oral argument schedule for its November session.  The argument in Mayo Foundation is scheduled as the second case on Monday November 8, meaning it will begin around 11:00.  A decision is expected to issue in the spring, almost certainly no later than June 2011.  We will provide a report on the argument in November.… Read More

Taxpayers’ Brief Filed in Mayo Foundation

The taxpayers have filed their opening brief in Mayo Foundation, a copy of which is attached.  They argue primarily that the statutory language of the exemption unambiguously includes medical residents, and therefore there is no occasion to consider the reasonableness of the IRS regulation.  Secondarily, they argue that the regulation is in any event arbitrary and unreasonable. 

With respect to the question of the correct deference analysis discussed in our previous post, the brief relies heavily on the National Muffler Dealers factors.  It identifies five factors that militate against the reasonableness of the regulation:  (1) does not harmonize … Read More

Supreme Court to Address Deference Owed to Regulation Governing FICA Taxation of Medical Residents

In Mayo Foundation, et al. v. United States, No. 09-837, the Supreme Court will consider whether medical residents are exempt from FICA taxation, with the decision likely to turn on the level of deference the Court is willing to accord to a recent regulatory change.  Although the issue may seem obscure, there are 8,000 residency programs in the United States, and the government estimates that $700 million in taxes per year is at stake, with $2.1 billion in refund claims pending.  

The issue involves the meaning of the “student exemption” to FICA, which excludes from the definition of “employment” “service … Read More