Mayo Foundation v. United States

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Whether (1) Congress intended that the term “student” be given a broad construction under the Federal Insurance Contributions Act, and (2) the Treasury Department’s regulation construing “student” to exclude medical residents is arbitrary and unreasonable?

Oral argument: 
November 8, 2010

The Mayo Foundation is suing for a refund of FICA taxes paid on behalf of its medical residents. The IRS claims that medical residents are not students and thus are not eligible for the FICA exemption for student employment. The Treasury Department released regulations that deny the student exemption to any employee that works more than 40 hours per a week. The Mayo Foundation contends that the IRS’s interpretation of the term “student” is incorrect and contrary to congressional intent. If the court rules that medical residents are students, this could lead to significant tax savings for hospitals and residents while reducing the availability of worker protections for medical residents.

Questions as Framed for the Court by the Parties 

Whether the Treasury Department can categorically exclude all medical residents and other fulltime employees from the definition of “student” in 26 U.S.C. § 3121(b)(10), which exempts from Social Security taxes “service performed in the employ of a school, college, or university” by a “student who is enrolled and regularly attending classes at such school, college, or university.”



The tax dispute between the Respondent, United States of America (“IRS”), and the Petitioners, Mayo Foundation for Medical Education and Research, Mayo Clinic, and Regents of the University of Minnesota (“Mayo”), is over whether Mayo is responsible for paying Federal Insurance Contributions Act ("FICA") tax, a payroll tax for Social Security and Medicare, on behalf of its medical residents. The tax is imposed on both the employee and the employer. Section 3121(a) details how the tax is calculated from paid wages of employment-related income. Employment-related income is described in Section 3121(b) as being “any service performed by an employee” with an exception for income derived from a student’s service to a college or university.

The FICA tax exempts earnings by students when the earnings are only incidental to the student’s primary purpose of education. The exemption has generally applied to graduate students who are engaged in significant paid teaching and research activities. However, the IRS has not considered medical residents to be students and has faced numerous legal challenges over its treatment of medical residents. The lack of clarity as to when students performing services could claim the exemption led to the Treasury Department developing new rules for the determination of exemption from FICA for students in 2004. The federal regulation, adopted in 2005, states that if the employee worked more than 40 hours in a week, then the employee could not be classified as a student and would not qualify for the FICA exemption. The new approach advocated by the IRS will automatically treat medical residents as non-students without an examination of the particular residence programs or the medical resident’s educational and employment activities.


Mayo sued the IRS in 2005 for a refund of the FICA taxes paid for its medical residents following the enactment of the Treasury Regulation. The United States District Court for the District of Minnesota found the Treasury department’s interpretation of Section 3121(b)(10) to be incorrect and struck down the provision which eliminated the facts and circumstances analysis when an employee worked more than 40 hours a week. The District Court found that the regulation relied on an interpretation of a “student” which conflict with the regular and ordinary meaning of the word.

The Eighth Circuit Court of Appeals reversed and ruled that the Treasury Regulation interpretation should be given deference because it addresses an ambiguity within the framework of the statute. Furthermore, the court held that the Treasury has the right to interpret words outside of a plain or ordinary meaning because many definitions create ambiguity when applied to tax. The court noted that the statute was ambiguous as to whether a medical resident would qualify as a student for the exemption. However, the court found the Treasury’s interpretation of the statute within the history of the FICA exemption.

The Supreme Court granted certiorari to decide whether medical students fall under the “student” exemption in FICA.


Petitioners, Mayo Foundation for Medical Education and Research, Mayo Clinic, and Regents of the University of Minnesota (“Mayo”), allege that medical residents are considered “students” under the plain language of the Federal Insurance Contributions Act (“FICA”), and are thus covered by the exemption for students under Section 3121(b)(10). In contrast, the United States (“IRS”) argues that the Treasury Department’s regulations reasonably exclude medical residents from the FICA exemption because the term “student” typically refers to individuals who are primarily focused on their studies.

How Did Congress Intend for the Courts to Construe “Student”?

Mayo contends that the Eighth Circuit’s affirmation of the new regulation ignores the plain language of the exemption and misinterprets the nature of medical residency programs. According to Mayo, if Congress had intended to exclude medical residents from the exemption for students, it would have stated that the exemption did not cover individuals engaged in hands-on, clinical education for more than 40 hours per week. Because the statute has no such constraint, Mayo argues that the plain meaning of the term “student” should determine whom Congress intended the exemption to cover.

According to Mayo, under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., the Supreme Court looks to the intent of Congress when reviewing an agency’s interpretation of a statute; if Congress has spoken on the precise issue in question, then the courts must uphold Congress’s intent. Mayo argues that Congress clearly exempted “students” from the FICA taxation and intended the term to encompass its plain, ordinary meaning. Mayo points to the Oxford Universal Dictionary definition of a “student” as an individual who applies his or her mind to “the acquisition of learning, whether by means of books, observation, or experiment.” Mayo claims that this plain and ordinary definition of “student” should not be narrowed by the Treasury Department because doing so undermines congressional intent and is thus invalid.

To establish that the medical residents enrolled at Mayo are “students” under the meaning that Congress intended to give to the term, Mayo argues that the residents are enrolled in and regularly attend Mayo’s graduate courses, are required to receive training in a clinical and classroom setting, and that aspiring residents apply to residency programs for its educational value, not with the expectation of receiving a job from the program. In addition, Mayo notes that the residents undergo an academic program that is almost the same as what a third- or fourth-year medical student experiences—and the Supreme Court has already ruled that those third and fourth years are “students.” Mayo argues that because its residency programs have a clear academic objective and are educational in nature, the medical residents qualify as “students” for the purposes of the student exemption.

The IRS, however, asserts that the term “student” is often defined much more narrowly to bar from coverage full-time employees learning on the job, and that such a construction of the term is consistent with its ordinary usage. Also, the IRS points out that if the Supreme Court were to construe “student” so broadly, any employee of a school could theoretically obtain an exemption from the FICA tax by enrolling in evening classes—a result that Congress could not have intended. The IRS also notes that medical residents spend about 50 to 80 hours a week—a substantial majority of their working time—treating patients, sometimes with little to no supervision, in exchange for salaries and benefits. In sum, the IRS finds that medical residents act as full-time employees first, not students.

Finally, the IRS asserts that FICA’s objective is to collect monetary contributions from employees in order to pay for their benefits when workers retire or become disabled before retirement. Allowing full-time employees to be exempt from the FICA tax just because their work involves an educational component would defeat the purpose of the statute and severely undermine its effectiveness. Thus, the IRS argues that Petitioners are actually misconstruing Congress’s intent in enacting FICA and its limited exemptions for students.

Is the Regulation Excluding Medical Residents Arbitrary and Unreasonable?

Mayo also argues that the Treasury Department’s new regulation arbitrarily excludes certain groups of people, namely full-time employees, from the exemption for students based solely on the amount of time they spend learning. The arbitrary nature of the regulation, according to Mayo, comes from the distinction drawn between those who work forty hours a week or more and those who work less than forty hours. Mayo believes that the regulation’s focus should be on the educational nature of the work that an individual does, not on how long the person works. Specifically, if an individual’s work is designed to facilitate learning, the length of time that person spends engaged in such activity should not matter.

Furthermore, Mayo contends that the new regulation is also unreasonable under the factors set forth in National Muffler Dealers Ass’n, Inc. v. United States, where the Supreme Court reviewed a regulation by, among other things, looking to see if it was consistent with the plain language and purpose of the statute. Mayo argues that Congress, through the plain language of the statute and its legislative history, manifested its intention of creating an exemption for all students enrolled in and regularly attending classes—thus, the new regulations unreasonably interfere with Congress’s objectives.

On the other hand, the IRS argues that the Treasury Department’s regulations reasonably interpret the student exemptions as excluding full-time employees, regardless of whether their work has an educational component. The IRS denies that the regulation arbitrarily focuses on the amount of time one spends working because such focus conveys the statutory intention of only covering individuals who are predominantly students. According to the IRS, Mayo’s argument that medical residents qualify for the exemption conflicts with Congress’s intentions when it enacted the student exemption for FICA. At the time, Congress also enacted an exemption for medical interns that excluded medical residents (this intern exemption was later repealed in 1965). In addition, the IRS contends, the historical understanding of taxpayers and the government has been that the student exemption covers individuals who are primarily students, not those that merely have an educational component in their work.

Furthermore, the IRS argues that most of the tests established in National Muffler that Mayo discusses as support for their stance are irrelevant under the more recent case, Chevron, which superseded National Muffler. The Supreme Court in Chevron held that courts must defer to an agency’s interpretation as embodied in its regulations so long as the regulation interprets the statute in a permissible way, and the statute fails to directly address the issue in question.


The dispute between the Mayo Foundation for Medical Education and Research, Mayo Clinic, and Regents of the University of Minnesota (“Mayo”) and the United States of America (“IRS”) revolves around the definition of a student. The IRS contends that if an individual works more than 40 hours per a week, then as a rule, that individual cannot be a student and is thus liable for Federal Insurance Contributions Act (“FICA”) taxes. However, Mayo argues that the IRS’s definition of student is outside of the plain and commonly understood meaning of a student and that the primary purpose of a medical residency program is educational.

Reduced Medical Education and Medical Services

The imposition of the FICA tax imposes a 700 million dollar cost on the medical system and impacts the education of over 107,000 residents, according to the Association of American Medical Colleges (“AAMC”). If the court were to rule for Mayo, hospitals and medical residents would no longer be liable for the FICA taxes and would also be able to claim back FICA taxes paid since 2005. However, according to AAMC, if the court were to rule for the IRS then the continued loss of financial resources to hospitals could further slow the pace of reforms and lead to a bottleneck for the training of new doctors at the residency level. The AAMC further contends that FICA taxes are especially harmful to medical residents due to their limited means and high debt loads. The AAMC argues that, at the margins, the increased burden impacts medical residents’ choice of residency, or even financial ability to pursue further specialization. A resident’s ability to forgo income to receive further training and specialization is reduced by the additional tax on their limited earnings.

Furthermore, the American Hospital Association (“AHA”) argues that hospitals are facing significant challenges to their operating margin, suffering from significant reductions of reimbursement for hospital care provided, due to increased numbers of uninsured patients and chronic underpayment by Medicare and Medicaid Thus, the AHA contends that imposition of the tax, though seemingly marginal, has a significant burden on the hospital system that undermines the hospitals ability to provide services. The AHA points out that, because hospitals are a key safety net for many of the communities in which they operate, the reduction of service capabilities due to the imposition of the FICA tax on medical residents is especially likely to harm the underprivileged.

Reduced Employment-Related Benefits and Protections

A major impact to medical residents’ status is their eligibility for the social safety net, which the FICA taxes support. The IRS also notes that if the FICA tax is not imposed on residents then their lifetime contribution to Social Security is reduced, which would also reduce the amount they would qualify for at retirement. Additionally, the IRS also notes that residents do not have disability insurance protection provided through the Social Security system, nor do residents’ children receive survivor benefits if the residents are deceased.

An additional concern raised by the Committee of Interns and Residents (“CIR”) is that hospitals will use a ruling that medical residents are students to challenge the applicability of other employer regulatory regimes to their medical residents. As support for its concern, the CIR points to the fact that teaching hospitals have a history of trying to deprive residents of legal protections that other employees are entitled to. The Doctors Council SEIU is also concerned that a ruling treating medical residents as students would result in residents losing their ability to utilize family medical leave, collective bargaining, and unemployment insurance. The Doctors Council insists that the potential loss of disability benefits would be particularly catastrophic for residents who, as physicians, are especially at risk of suffering employment-related injuries from transmission of infectious diseases through needles, among others.


This case will allow the Supreme Court to resolve the dispute surrounding the term “student” for the purposes of the student exemption in the Federal Insurance Contributions Act. It is currently unclear whether Congress intended “student” to encompass medical residents. In its new regulations, the Treasury Department excluded full-time employees, including medical residents, from the tax exemptions based on its belief that full-time employees are not “students” under FICA. According to Mayo, medical residents fall under the plain meaning of the term “student,” and the regulation is arbitrary and unreasonable because it draws a distinction between individuals who work at least forty hours a week and those who work any less. The IRS, in contrast, insists that the regulations reasonably interpret the student exemptions as excluding full-time employees and that Congress did not intend for medical residents to fall under the “student” category. This case will have an effect on hospital services and medical students because if the Court sides with Mayo, it may relieve the hospital system from the burden that imposing the tax would have on their ability to provide services, and it would help limit the amount of debt that medical residents already face. On the other hand, finding in favor of the IRS would help support the nation’s Social Security system, which is in dire need of funds.

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Additional Resources 

Inside Higher Ed, Doug Lederman: High Court to Hear Tax Case (June 2, 2010), Tax Information Guide