Mayo Foundation for Medical Education and Research v. United States

Generally, both an employer and an employee pay social security taxes on wages earned by the employee. Wages earned by a student, however, are exempt from social security taxes pursuant to Internal Revenue Code (IRC) § 3121(b)(10). Students are able to claim this exemption if they work for their schools “as an incident to” their studies. The Social Security Administration (SSA) always interpreted Section 3121(b)(10) to exclude medical residents from claiming the exemption. However, in 1998, the Court of Appeals for the Eighth Circuit held that the SSA could not categorically exclude residents from student status and required that the SSA make determinations of a resident’s student status on a case-by-case basis. In 2004, the Treasury promulgated a new regulation interpreting Section 3121(b)(10). It defined a student’s employment as an “incident” to one’s studies where the educational aspect of the employment predominated over the service aspect. The regulation categorically defined full-time employment of 40 hours or more per week as not incident to an employee’s studies. The regulation specifically noted that a resident working 40 hours or more was not a student for the purposes of Section 3121(b)(10). The Mayo Foundation for Medical Education and Research (Mayo) (plaintiff) runs medical residency programs for medical students, who attend to patients approximately 50-80 hours a week and earn a stipend. In response to the new regulation, Mayo brought suit against the United States (defendant), seeking a return of taxes paid on its residents’ stipends on grounds that residents should be classified as exempt under Section 3121(b)(10). The district court granted Mayo’s motion for summary judgment. The Court of Appeals reversed.