The Mayo Foundation hires medical residents to work 40+ hours a week in its residency program, which allows recent medical school graduates to receive additional instruction in a chosen specialty. Although residents attend some formal educational activities, they primarily learn through hands-on experience. The Mayo Foundation pays each resident an annual stipend of $40,000 and provides each with health insurance, malpractice insurance, and paid vacation time.
The Mayo sought a refund of FICA (Federal Insurance Contributions Act) taxes paid on the stipend. The Internal Revenue Code (26 U.S.C. §§ 3101 and 3111 defines wages as remuneration for employment, and defines employment as any service performed by an employee for the person employing him. But § 3121 excludes from taxation any service performed by a student in the service of a school, college, or university when the student is enrolled and regularly attending classes at the school.
Since 1951, the Internal Revenue Service (IRS) had considered students exempt from taxation when they worked for their schools "as an incident to and for the purpose of pursing a course of study." In 2004, the IRS issued a new regulation that provided that if a student worked 40 or more hours a week, the student was not to be considered working "incident to or for the purpose of pursuing a course of study." In promulgating this new rule, the IRS gave an example of a medical resident working more than 40 hours a week and concluded that the resident was not a student.
In the U.S. District Court for the District of Minnesota, the Mayo Foundation filed suit asserting that the rule was invalid. The U.S. District Court agreed that the rule was invalid, but the Eighth Circuit Court of Appeals reversed the district court's opinion. The U.S. Supreme Court unanimously affirmed the decision of the court of appeals, thereby affirming that the Mayo Foundation did have to withhold FICA taxes from the stipends of medical residents. Justice Kagan did not participate in deciding this case. See Mayo Foundation v. United States, decided on January 11, 2011.
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