Exempt Organizations Advisory - Supreme Court will Hear Tax Case Regarding Medical Residents

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com) 

The Supreme Court has agreed to hear Mayo Foundation for Medical Education and Research et. al. v. United States regarding whether medical schools and university hospitals are required to pay FICA taxes for medical residents. Under section 3121(b)(10), students who are employed by a school, college, or university and are enrolled and regularly attending classes at the institution are exempt from FICA taxes. In 2004, Treasury amended the regulations to provide that the exemption does not apply to students that work 40 hours or more per week; the regulations also include a specific example that addresses the application of the rule to medical residents. Treas. Reg. § 31.3121(b)(10)-2(e), Ex. 4. The Mayo Foundation for Medical Education and Research, the Mayo Clinic and the Regents of the University of Minnesota challenged these changes to the regulations. In 2009, the Eighth Circuit overturned a district court opinion and held that the regulations were a reasonable interpretation of the statute. Other circuits have ruled that the regulations cannot categorically exclude all full-time employees from the student exception.