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Mayo Foundation for Medical Education and Research, et al. v. United States

Supreme Court of the United States
562 U.S. (2011)
ELI5:

Rule of Law:

Treasury Department regulations promulgated under a general grant of rulemaking authority are subject to the deferential two-step framework of Chevron, which requires a court to uphold a regulation so long as it is based on a permissible construction of an ambiguous statute.


Facts:

  • Mayo Foundation for Medical Education and Research (Mayo) offers medical residency programs to train doctors who have graduated from medical school.
  • These residency programs, typically lasting three to five years, require residents to spend 50 to 80 hours per week caring for patients.
  • Residents' duties include examining and diagnosing patients, prescribing medication, and performing procedures under the supervision of senior residents and attending physicians.
  • While primarily engaged in patient care, residents also participate in a formal educational program involving assigned readings, lectures, and written exams.
  • In 2005, Mayo paid its residents annual stipends between $41,000 and $56,000 and provided them with benefits such as health insurance, malpractice insurance, and paid vacation.
  • A provision of the Federal Insurance Contributions Act (FICA), 26 U.S.C. § 3121(b)(10), exempts from taxation services performed by a 'student who is enrolled and regularly attending classes' at their school.
  • In 2004, the Treasury Department issued a 'full-time employee rule' stating that an employee scheduled to work 40 hours or more per week is not considered a student for FICA exemption purposes, and specifically used medical residents as an example.

Procedural Posture:

  • Mayo filed suit in the U.S. District Court for the District of Minnesota seeking a refund of FICA taxes paid on behalf of its medical residents.
  • The District Court granted summary judgment for Mayo, finding the Treasury's 'full-time employee rule' invalid.
  • The U.S. Government, as the appellee, appealed to the U.S. Court of Appeals for the Eighth Circuit.
  • The Eighth Circuit reversed the District Court's decision, applying Chevron deference and upholding the regulation as a permissible interpretation of the statute.
  • Mayo Foundation, as the petitioner, successfully petitioned the U.S. Supreme Court for a writ of certiorari.

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Issue:

Does a Treasury Department regulation that categorically excludes any employee who works a normal schedule of 40 hours or more per week from the 'student' exemption for FICA taxes represent a permissible interpretation of the Internal Revenue Code, 26 U.S.C. § 3121(b)(10)?


Opinions:

Majority - Chief Justice Roberts

Yes. The Treasury Department regulation is a permissible interpretation of the statute. The Court first held that the Chevron framework, not the less deferential multifactor test from National Muffler, is the correct standard for reviewing Treasury regulations issued under a general grant of authority, thus unifying the standard of review for tax regulations with that of other administrative agencies. Applying Chevron step one, the Court found the term 'student' in § 3121(b)(10) to be ambiguous, as Congress did not define the term or directly address whether medical residents would qualify. At Chevron step two, the Court concluded that the Department's full-time employee rule is a reasonable interpretation of the ambiguous text. The 40-hour bright-line rule is a 'perfectly sensible' way to distinguish between 'workers who study and students who work,' improves administrability, and avoids wasteful case-by-case litigation. The rule is consistent with the broad purpose of the Social Security Act and the narrow construction of tax exemptions.



Analysis:

This decision significantly strengthens the authority of the Treasury Department by explicitly holding that its notice-and-comment regulations are entitled to Chevron deference. It definitively supplants the older, less deferential National Muffler standard, aligning the judicial review of tax regulations with general administrative law principles. This ruling makes it more difficult for taxpayers to challenge Treasury regulations, as they must now show that a regulation is an arbitrary or capricious interpretation of an ambiguous statute, rather than merely arguing it is inconsistent or not a contemporaneous interpretation. The decision grants the Treasury greater flexibility in interpreting and administering the complex Internal Revenue Code.

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