Tax Law and Administration

Congress enacted the Federal Insurance Contribution Act (“FICA”) to collect funds for Social Security.  FICA provides exemptions for student workers. The Treasury Department applies the student exception where the student’s work is an “incident to and for the purpose of pursuing a course of study.”  According to a Treasury Department rule issued in 2004, services of a full-time employee working 40 or more hours a week are not considered “incident to and for the purpose of pursuing a course of study.”

The Mayo Foundation offers medical residency programs in which residents are required to spend between 50 and 80 hours a week caring for patients under the supervision of senior residents and faculty members.  Residents are also assigned textbooks and expected to attend lectures.  In 2005, Mayo paid its residents annual stipends, and paid FICA taxes on behalf of the residents.  Mayo filed suit in the U.S. District Court for the District of Minnesota seeking a refund of the FICA taxes paid and asserting that residents are exempt from FICA taxes.  The District Court granted summary judgment in favor of Mayo, holding that the full-time employment rule was inconsistent with the text of FICA.  The Eighth Circuit Court of Appeals reversed, concluding that the statute was ambiguous on the question of whether a medical resident was a student under FICA.  A question raised by both these lower court rulings, and by the parties, was whether Supreme Court precedent required Treasury Department rulemaking to be judged according to a less deferential standard of administrative review than is applied to other administrative agencies under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.

In Mayo Foundation v. United States (09-837), a unanimous court, sitting without Justice Kagan, affirmed the judgment of the Eighth Circuit.  Writing for the majority, Chief Justice Roberts concluded that the Treasury Department’s full-time employee rule was a reasonable construction of the student exception.   The Court found no justification for carving out a special standard of administrative review for tax law, and therefore held that Chevron’s deferential standard should be applied to Treasury Department administrative action.  In applying the Chevron test, the Court held that Congress did not directly address the definition of "student," and that the Treasury Department’s rule was a reasonable interpretation of the statute’s text.