Amended regulations on the student exception from FICA are invalid.

• Author: Beavers, James
• Position: Federal Insurance Contributions Act

The Mayo Clinic (Mayo) and Mayo Foundation for Medical Education & Research (MFMER) are nonprofit corporations in Minnesota. MFMER acts as Mayo's agent for purposes of paying withholding and FICA taxes for Mayo's employees. Mayo operates graduate medical education programs for medical residents and fellows (residents). Most of these programs are formally reviewed and approved by national accreditation bodies. Residents are enrolled in the programs, register for courses, attend lectures, perform research, and participate in teaching rounds and patient care. They also receive grades or written evaluations for their performance in each course and may be terminated from the programs for failing to satisfy academic standards. Finally, they receive formal certification on completion of the programs. Mayo pays a stipend to the residents to provide a minimum level of financial support during their enrollment.

Mayo I

MFMER and Mayo sought a refund of FICA taxes paid on the residents' stipends in the years 1994-1996, which Mayo believed were exempt from FICA under the student employment exception. Under Sec. 3121(b)(10), a student enrolled at a school, college, or university is exempt from FICA on wages paid for services performed for that school, college, or university. Prior to 2003, the IRS maintained that, as a matter of law, the student exception could never apply to medical residents. In addition, although the existing regulations (Regs. Sec. 31.3121(b)(10)-2) specifically stated that the term "school, college, or university" was to be taken in its commonly and generally accepted sense for purposes of the student exception, the Service argued that an institution qualified for the exception only if its primary purpose was to serve as a school, college, or university (the primary purpose test).

The IRS refused the refund request, and MFMER and Mayo filed a refund claim in district court. In 2003, in Mayo Foundation for Medical Education and Research, 282 FSupp2d 997 (D. Minn. 2003) (Mayo I), a district court held that, as a matter of law, a medical resident could be considered a student for purposes of the exception and that the IRS's primary purpose test was invalid. Instead, the court held that the term "school, college, or university" should be taken, as the regulations stated, in its commonly or generally accepted sense and that the determination of whether the exception applied should be made on a case-by-case basis. After reviewing the...