Mayo Foundation v. United States

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.