Amended Regulations on the Student Exception from FICA Are Invalid

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-bycase basis. After reviewing the evidence, the court found that in the commonly and generally accepted sense of the term, Mayo was a school, college, or university. It also found that under the standards set out in the regulations, Mayo’s residents qualified as students. Therefore, the court held that the stipends Mayo paid to its medical residents were not subject to FICA.

Mayo II

In order to avoid the problems it encountered in Mayo I caused by the existing regulations’ language, the Service proposed regulations in 2003, which were finalized in April 2005, that amended the existing regulations to specifically incorporate the primary purpose test into the determination of whether an institution was a school, college, or university. In addition, although it did not attribute the change to the Mayo I decision, the IRS added a rule in the amended regulations that an employee whose normal work schedule is more than 40 hours a week cannot be a student for purposes of the student exception.

After the amended regulations were finalized, MFMER resumed paying FICA on the resident’s stipends and later requested a refund of those taxes. The IRS refused the request, and MFMER and Mayo filed a refund suit in district court. The district court again held in favor of Mayo and ruled that the amended regulations were invalid.

The court looked to the statute’s plain meaning and found that the language of Sec. 3121 was unambiguous and that therefore the terms “school, college, or university” and “student” should be interpreted in their ordinary, everyday senses. The court also reviewed the amended regulations under the general standard for the review of interpretive regulations set out in National Muffler Dealers Association, Inc., 440 US 472 (1979), and found that they did not meet this standard. Because the primary purpose test and the 40-hour work week exception in the amended regulations departed from the ordinary, everyday sense of the terms in Sec. 3121 and because the regulations did not meet the general standards for interpretive regulations, the district court found the regulations inconsistent with the statute’s plain meaning and therefore invalid. It further held that under the plain meaning of the statute, Mayo’s residents were covered by the student exception and their stipends were not subject to FICA.


This case is the first test in the courts of the amended regulations under Sec. 3121( b)(10). Despite the poor results for the IRS, it is likely to continue pursuing this issue. Although the Eleventh Circuit and a number of district courts, in cases involving tax years before the amended regulations were finalized, have sided with the court in Mayo I and Mayo II and held that the plain meaning of Sec. 3121 ( b)(10) allows the student exception to apply to medical residents, a number of other district courts have held that it does not. These courts have held that the issue must be viewed in the overall context of Social Security law and that, in this context, the law is ambiguous. Finding the law ambiguous, the courts have looked at various expressions of congressional intent about Social Security coverage and have come to the conclusion that Congress intended medical residents to be subject to FICA. Therefore, according to these courts, they are subject to FICA as a matter of law.


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