On January 11, the Supreme Court decided Mayo Foundation for Medical Education and Research v. United States, No. 09-837, holding that the Department of Treasury's rule that doctors who serve as medical residents are not "students" is entitled to deference and thus their services are not exempt from FICA taxes.
Petitioners Mayo Foundation for Medical Education and Research, Mayo Clinic, and the Regents of the University of Minnesota offer residence programs that provide instruction to medical school graduates so they may become board certified. Participants in Mayo's residency program typically spend between fifty and eighty hours a week caring for patients and, in return, are paid a modest salary and receive certain employee benefits. Although the bulk of their time is spent caring for patients, Mayo residents are expected to participate in certain educational components of the residency program.
Congress funds Social Security through the Federal Insurance Contributions Act, which taxes both employers and employees on the wages employees earn. Certain categories of services and individuals are exempt from FICA's demands, including services 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."
The case arose after the Treasury Department adopted an amended rule in December 2004 that made clear that medical residents are not performing services "incident to and for the purpose of pursuing a course of study" and thus are not exempt "students" under FICA. Mayo responded by seeking a refund of the money it had withheld and paid on its resident's stipends, arguing that its residents were exempt and that the Treasury Department's new rule was invalid. The district court granted Mayo's motion for summary judgment, but the Eighth Circuit reversed.
The Supreme Court affirmed. It first determined that Congress had not directly addressed the precise question at issue—i.e., it had not defined "student" or stated whether medical residents are subject to FICA. It then confirmed that analysis of the Treasury Department's rule under the two-part framework announced in Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), was appropriate. The parties disagreed on the applicability of Chevron, but the Court found that the Treasury Department had issued the rule pursuant to an explicit authorization to prescribe needful rules and regulations and that it had done so after notice-and-comment procedures, both of which are good indicators of a rule meriting Chevron deference. The Court then found that the rule easily satisfied Chevron's second step, under which a court may not disturb an agency rule unless it is "arbitrary or capricious" or "manifestly contrary to the statute."
Chief Justice Roberts delivered the opinion of the Court, in which all other Members joined, except Justice Kagan, who took no part in the consideration or decision of the case.