The Supreme Court heard oral argument today in Mayo Foundation for Medical Education and Research v. United States, No. 09-837, a case asserting that the "student exception" in 26 U.S.C. section 3121(b)(10) exempts stipends paid to medical residents from FICA taxes. For a case analysis, see Mayo Foundation, Legal Information Institute, Nov. 8, 2010.
Briefly, the case revolves around the categorization of medical residents as "students" or as "employees." The original case in Mayo was decided at the district court level under old regulations (a case called Mayo I by the Eighth Circuit) and concluded that the student exemption applied. The IRS did not appeal Mayo I, and decided administratively not to contest the claim of excemption for medical residents prior to April 1, 2005. As of that date, however, the IRS regulations were amended to provide that medical residents who work 40 or more hours per week are considered full-time employees who are not eligible for the student exception because their services "are not incident to and for the purpose of pursuing a course of study." T.D. 9167, 2005-1 C.B. 261, 69 Fed. Reg. 76404 (Dec. 21, 2004). 26 C.F.R. section 31.3121(b)(10)--2(e) Ex 4; -2(f); -2(d)(3)(iii) (final regulations effective Apr. 1, 2005).
The Mayo Foundation challenged the regulations, questioning whether Treasury can "categorically exclude" medical residents from the definition of student, merely because they are also full-time employees. The district court ruled that the regulation was invalid. Mayo Found. for Med. Educ. & Research v. United States, 503 F. Supp. 2d 1164 (D. Minn. 2007); Regents of the Univ. of Minn. V. United States, 2008 WL 906799 (D. Minn. Apr. 1, 2008) (concluding, at 1171-77, that the full-time employee exception to the application of the student exception was "arbitrary, capririous, and unreasonable"). The government appealed both decisions, even though the 11th, 2d, 7th and 6th Circuits had already ruled on cases under the pre-2005 former regulations that the FICA statute as construed under the former regulations did not permit a categorical treatment of medical residents as ineligible for the student exception. See 486 F.3d 1248 (11th Cir. 2007); 563 F.3d 19 (2d. Cir. 2009); 557 F.3d 412 (6th Cir. 2009); 545 F.3d 564 (7th Cir. 2008).
The Eighth Circuit's June 12, 2009 decision reversed, noting an "avalanche" of litigation on this issue that has "exploded across the country" and concluding that the appropriate answer was to defer to the IRS regulation that treats medical residents who work more than 40 hours a week as subject to the employment taxes.
The Supreme Court granted a petition for writ of certiorari in Mayo Foundation on June 1, 2010 (2010 WL 149135) and held oral argument today. BNA reports in Daily Tax RealTime (Nov. 8, 2010 at 2:51) that "the justices ... appeared to be looking to set out a clear rule for applying the student exemption to the Federal Insurance Contributions Act" (FICA) during the argument. As Chief Justice Roberts commented in the hearing: "The only way you can draw the line [for an apprentice who is both an employee and a student] is to have somebody say: This is going to be the line. And if anybody is going to say it, it ought to be the IRS." BHA, op.cit.
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