Supreme Court Agrees to Decide Whether Treasury Department Can Force Teaching Hospitals to Pay Social Security Tax for Work Performed by Medical Residents


On June 1, 2010, the Supreme Court agreed to decide a case that implicates $700 million a year in federal tax obligations of medical institutions, such as teaching hospitals and medical schools, and their residents. In granting the petition for certiorari in Mayo Foundation for Medical Education & Research v. United States, the Court took on the question whether the Treasury Department can categorically exclude all medical residents and other fulltime employees from the federal law that exempts work performed by “student[s]” from the obligation to pay Social Security taxes.

Social Security taxes are imposed on employers and employees under the Federal Insurance Contributions Act (FICA), but the statute carves out an exemption for work performed by individuals who are students at the schools, colleges, or universities at which they are employed. Faced with a series of judicial decisions holding that medical residents are eligible for a “Student Exemption,” the Treasury Department amended its regulations to provide that full-time employees, including medical residents, do not qualify. The Mayo Foundation and the University of Minnesota asserted tax refund claims challenging the amended regulations. The district court held the regulations invalid on the ground that they conflicted with the Student Exemption as adopted by Congress. The Court of Appeals for the Eighth Circuit reversed, holding that the Treasury Department’s exclusion of fulltime employees was entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. In so holding, the Eighth Circuit created a split among the federal appellate courts, prompting the Supreme Court to grant certiorari in order to clarify the law.

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