Mayo Foundation For Medical Education And Research Et Al. v  United States


The question presented in the case was whether doctors who serve as medical residents can properly be viewed as “students” whose service Congress had exempted from FICA taxes under 26 U. S. C. §3121(b)(10). Petitioners Mayo Foundation for Medical Education and Research, Mayo Clinic, and the Regents of the University of Minnesota (collectively Mayo) offer medical residency programs. Mayo’s residency programs, which usually last three to five years, train doctors primarily through hands-on experience.

Residents often spend between 50 and 80 hours a week caring for patients, typically examining and diagnosing them, prescribing medication, recommending plans of care, and performing certain procedures. Mayo paid its residents annual “stipends” ranging between $41,000 and $56,000 and provided them with health insurance, malpractice insurance, and paid vacation time. Mayo residents also take part in a formal and structured educational program. Residents also take written exams and are evaluated by the attending faculty physicians.

 Congress fund its  Social Security programme by taxing both employers and employees under FICA on the wages employees earn. 26 U. S. C. §3101(a) (tax on employees); §3111(a) (tax on employers). Congress had defined “wages” broadly, to encompass all remuneration for employment. §3121(a). The term “employment” similarly  extend to any service, of whatever nature, performed . . . by an employee for the person employing him. §3121(b).Congress had exempted certain categories of service and individuals from FICA’s demands has excluded from taxation “service performed in the employ of . . . a school, college, or university . . . if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.” §3121(b)(10) (2006 ed.). The Social Security Act, which govern workers’ eligibility for benefits, contain a corresponding student exception materially identical to §3121(b)(10). 42 U. S. C. §410(a)(10). Since 1951, the Treasury Department had applied the student exception to exempt from taxation students who work for their schools “as an incident to and for the purpose of pursuing a course of study” there. Until 2005, the Department determined whether an individual’s work was “incident to” his studies by performing a case-by-case analysis.

In 2004 the Department adopted an amended rule prescribing that an employee’s service is “incident” to his studies only when the educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, is predominant. The rule categorically provided that the services of a full-time employee—as defined by the employer’s policies, but in any event including any employee normally scheduled to work 40 hours or more per week—are not incident to and for the purpose of pursuing a course of study. After the Department promulgated the full-time employee rule, Mayo asserted that its residents were exempt under §3121(b)(10) and that the Treasury Department’s full-time employee rule was invalid. The District Court granted Mayo’s motion for summary judgment. The court held that the full-time employee rule was inconsistent with the unambiguous text of §3121, which the court understood to dictate that an employee was a ‘student’ so long as the educational aspect of his service predominates over the service aspect of the relationship with his employer.

The Government appealed, and the Court of Appeals reversed, 568 F. 3d 675, concluding that the statute was silent or ambiguous on the question whether a medical resident working for the school fulltime was a ‘student’ for purposes of §3121(b)(10), and that the Department’s amended regulation was a permissible interpretation of the statute. Supreme Court granted Mayo’s petition for certiorari.

The Supreme Court began its analysis with the first step of the two-part framework announced in Chevron, and asked whether Congress had “directly addressed the precise question at issue.”  It agreed with the Court of Appeals that Congress had not done so as the statute did not define the term “student,” and did not otherwise attend to the precise question whether medical residents were subject to FICA. 26 U. S. C. §3121(b)(10).

The Supreme Court disagreed with the District Court interpretation of §3121(b)(10) as unambiguously foreclosing the Department’s rule by mandating that an employee be deemed “a ‘student’ so long as the educational aspect of his service predominates over the service aspect of the relationship with his employer.”

The  Supreme Court after discussing earlier cases held that Chevron and Mead, rather than National Muffler and Rowan, provided the appropriate framework for evaluating the full-time employee rule. The Department issued the full-time employee rule pursuant to the explicit authorization to prescribe all needful rules and regulations for the enforcement of the Internal Revenue Code. 26 U. S. C. §7805(a). The Department issued the full-time employee rule only after notice-and-comment procedures.

It reiterated that the ultimate question was 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. It further held that the full-time employee rule easily satisfied the second step of Chevron, which asked whether the Department’s rule was a “reasonable interpretation” of the enacted text.

The Supreme Court concluded that as the Congress had not directly spoken on the issue and because the Treasury Department’s rule was a reasonable construction of what Congress had said, the judgment of the Court of Appeals was thus affirmed.