Mayo Foundation for Medical Education & Research v. United States

Background

A group of teaching institutions that run medical residency programs (including the Mayo Foundation, Mayo Clinic, and the University of Minnesota) sued after the Treasury Department adopted a rule treating full-time medical residents as non-exempt employees for Social Security payroll taxes. Residents typically work long hours (often 50–80 hours weekly), receive annual stipends (about $41,000–$56,000 in 2005), benefits, and participate in structured educational programs, but spend most of their time caring for patients. The Treasury’s rule classified workers scheduled 40 or more hours per week as not "students" for the tax exemption, and Mayo sought refunds of withheld taxes for 2005.

Reasoning

The Court found the statute ambiguous about whether residents are "students" for the tax exemption and therefore applied the standard that lets agencies fill gaps in unclear tax laws. The Justices concluded the Treasury Department’s 40-hour full-time rule is a reasonable way to tell when the service aspect, rather than the educational aspect, predominates. The Court emphasized administrability, the rule’s fit with Social Security’s broad coverage, and the Treasury’s notice-and-comment rulemaking. The Court therefore affirmed the lower court that had upheld the Treasury regulation.

Real world impact

Because the Court sustained the regulation, teaching hospitals and similar employers must withhold and pay Social Security payroll taxes on most residents’ stipends, and refund claims based on the student exception are limited. The Social Security Administration continues to treat residents as eligible for coverage. Justice Kagan did not participate in the decision.