In Mayo Foundation for Medical Education and Research v. United States, No. 09-837(Jan. 11, 2011), the U.S. Supreme Court held unanimously that medical residents were properly classified by the Internal Revenue Service as employees and not "students" for FICA tax purposes. Chief Justice John Roberts wrote the opinion for eight of the Justices (Justice Kagan did not participate). The Court accepted this appeal from a decision of the U.S. Court of Appeals for the Eighth Circuit, which ruled in favor of the IRS's regulatory interpretation of the statute, reversing a decision of a federal district court, which held the regulation inconsistent with the statute.
The narrow question presented for decision by the high court was whether medical residents, doctors who have graduated from medical school and seek additional instruction in a chosen specialty, qualified as "students" under Section 312 of the Internal Revenue Code. If they were students, then their annual stipends, more than $40,000 annually in this case, plus benefits, would be exempt from taxation under that provision, which applies to service performed by a student who is enrolled in a school, college or university.
The IRS has interpreted this provision of the statute since the 1950s in a way that allows the exemption only for students who work for their schools "as an incident to and for the purpose of pursuing a course of study." In 2004, the IRS revised its regulations to exclude full-time employees who are normally scheduled to work 40 hours or more per week. The medical residents typically worked 50 to 80 hours per week. The IRS claimed that the employer owed FICA taxes on the wages paid, and the employer objected contending that the regulation was invalid. A federal district court agreed with the Mayo Foundation; the Eighth Circuit reversed that decision and ruled in favor of the IRS. The Supreme Court affirmed the Court of Appeals.
While this issue is one of significance for certain medical school employers, it appears that the Supreme Court took the case to clarify a point of administrative law. In the past two decades, the high court has adopted a test for reviewing administrative agency regulations that accord them a degree of deference depending on the circumstances of the case. The seminal decision is Chevron U.S.A., Inc. v. Natural Resources Defense Council (1984). In summary, when the plain language of a statute does not provide an answer, and an administrative agency possesses the statutory authority to promulgate a regulation, the federal courts usually will not disturb an agency rule unless it is "arbitrary or capricious in substance, or manifestly contrary to the statute."> In an earlier case involving a different IRS regulation, however, National Muffler Dealers Association, Inc. v. United States (1979), the Supreme Court had articulated a different test for deference to tax regulations. In the Mayo Foundation case, the Court clarified its holdings and determined that the more recent test set out in the Chevron case applies to IRS regulations and rejected the notion of a separate test for tax regulations.
Thus, the significance of the Mayo Foundation case is to reinforce the rule in Chevron regarding judicial deference to federal agency administrative rulemaking and to foreclose the use of alternative tests for IRS regulations. While the precise holding of the case may be of interest mainly to medical schools or other schools, the decision is likely to have broader implications in the field of administrative law.
