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Mayo Foundation for Medical Education and Research v. United States

FACTS Most doctors who graduate from medical school in the United States pursue additional education in a specialty to become board certified to practice in that field (e.g. orthopedics, cardiology, ophthalmology). Plaintiffs Mayo Foundation for Medical Education and Research, Mayo Clinic, and the Regents of the University of Minnesota (collectively Mayo) offer medical residency programs that provide such instruction. Mayo’s residency programs, which usually last three to five years, train doctors primarily through hands-on experience. Residents often spend between fifty and eighty hours a week caring for patients supervised by more senior residents and by faculty members known as attending physicians. In 2005, 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 are assigned textbooks and journal articles to read and are expected to attend weekly lectures and other conferences. Residents also take written exams and are evaluated by the attending faculty physicians. The bulk of residents’ time is spent caring for patients.
Through the Social Security Act and related legislation, Congress has created a comprehensive national insurance system that provides benefits for retired workers, disabled workers, unemployed workers, and their families. Under the Federal Insurance Contributions Act (FICA), Congress funds Social Security by taxing both employers and employees on the wages employees earn.
Congress has defined “wages” to include “all remuneration for employment” and “employment” as “any service, of whatever nature, performed … by an employee for the person employing him.”
In Section 3121(b)(10), Congress 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.” In 2004, the Treasury Department adopted a rule prescribing that an employee’s service is “incident” to his studies only when “[t]he 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 provides that “[t]he services of a full-time employee”—as defined by the employer’s policies, but in any event including any employee normally scheduled to work forty hours or more per week—“are not incident to and for the purpose of pursuing a course of study.” The rule clarifies that the Department’s analysis “is not affected by the fact that the services performed … may have an educational, instructional, or training aspect.” The rule also includes as an example the case of a medical resident whose “normal work schedule calls for [him] to perform services forty or more hours per week,” and provides that his service is “not incident to and for the purpose of pursuing a course of study,” and he accordingly is not an exempt “student” under Section 3121(b)(10).
After the Department promulgated the full-time employee rule, Mayo filed suit asserting that its residents were exempt under §3121(b)(10) and that the Treasury Department’s full-time employee rule was invalid. The U.S. District Court granted Mayo’s motion for summary judgment. The Government appealed, and the U.S. Court of Appeals reversed. The U.S. Supreme Court granted Mayo’s petition for certiorari.

DECISION The judgment of the U.S. Court of Appeals is affirmed.

OPINION Analysis begins with the first step of the two-part framework announced in the U.S. Supreme Court case of Chevron USA Inc. v. Natural Resources Defense Council, Inc. This step asks whether Congress has “directly addressed the precise question at issue.” Congress has not done so here. The statute does not define the term “student,” and does not otherwise address the precise question whether medical residents are subject to FICA.
Under the second step of Chevron courts may not disturb an agency rule unless it is “arbitrary or capricious in substance, or manifestly contrary to the statute.” The principles underlying Chevron apply with full force in the tax context. Chevron recognized that “[t]he power of an administrative agency to administer a congressionally created … program necessarily requires the formulation of policy and the making of rules to fill any gap left, implicitly or explicitly, by Congress.” Filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation at least as complex as the ones other agencies must make in administering their statutes. Therefore, Supreme Court review of tax regulations should be guided by agency expertise pursuant to Chevron to the same extent as the Court’s review of other regulations.
The Chevron deference to an agency rule is appropriate “when it appears that Congress delegated authority to the agency generally to make rules carrying the force of law, and that the agency interpretation claiming deference was promulgated in the exercise of that authority.” 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.
The full-time employee rule easily satisfies the second step of Chevron, which asks whether the Department’s rule is a “reasonable interpretation” of the enacted text. To begin, Mayo accepts that “the ‘educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, [must] be predominant’” in order for an individual to qualify for the exemption. Mayo objects, however, to the Department’s conclusion that residents who work more than forty hours per week categorically cannot satisfy that requirement. Because residents’ employment is itself educational, Mayo argues, the hours a resident spends working make him “more of a student, not less of one.” Mayo contends that the Treasury Department should be required to engage in a case-by-case inquiry into “what [each] employee does [in his service] and why” he does it. Mayo also objects that the Department has drawn an arbitrary distinction between “hands-on training” and “classroom instruction.”
Regulation, like legislation, often requires drawing lines. Mayo does not dispute that the Treasury Department reasonably sought a way to distinguish between workers who study and students who work. The Department reasonably concluded that its fulltime employee rule would “improve administrability,” and it thereby “has avoided the wasteful litigation and continuing uncertainty that would inevitably accompany any purely case-by-case approach” like the one Mayo advocates.
There is no doubt that Mayo’s residents are engaged in a valuable educational pursuit or that they are students of their craft. The question whether they are “students” for purposes of §3121, however, is a different matter. Because it is one to which Congress has not directly spoken, and because the Treasury Department’s rule is a reasonable construction of what Congress has said, the judgment of the Court of Appeals must be affirmed.

INTERPRETATION Generally, when Congress has not directly addressed the precise question at issue, courts may not disturb an agency rule that attempts to resolve the question, unless it is arbitrary or capricious in substance or manifestly contrary to statute.

CRITICAL THINKING QUESTION

Do you agree that the agency’s full-time employee rule is better than a case-by-case approach? Explain.