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USDC: TAX | EDUCATION - IRS regulations denying medical residents FICA exemption invalid

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Mayo Foundation for Medical Education
and Research and Mayo Clinic,
Plaintiffs,
Civ. No. 06-5059 (RHK/JSM)
MEMORANDUM OPINION
AND ORDER
v.
United States of America,
Defendant.
Thomas W. Tinkham, John W. Windhorst, Jr., Christopher R. Duggan, Kristina W.
Carlson, Emily L. Fitzgerald, Dorsey & Whitney LLP, Minneapolis, Minnesota, Robert
M. Moore, Jr., Joanne L. Martin, Mayo Clinic, Rochester, Minnesota, for Plaintiffs.
Michael R. Pahl, Trial Attorney, Tax Division, United States Department of Justice,
Washington, D.C., for Defendant.
INTRODUCTION
Plaintiffs Mayo Foundation for Medical Education and Research (MFMER) and
Mayo Clinic (Mayo) commenced this action against Defendant United States of
America for the refund of FICA taxes withheld and paid on Mayos medical residents
stipends during the second quarter of 2005. The amount of Mayos claim is
,676,118.06, plus interest. This Court held in 2003 that stipends paid to medical
residents in 1994-1996 qualify for the student exclusion from FICA taxation and that
2
Mayo is a school, college, or university for purposes of the exclusion.1 The IRS
amended its regulations in 2004 (effective April 1, 2005) and, as a result, medical
residents no longer qualify for the exclusion. Mayo now moves for summary judgment.
For the reasons set forth below, the Court will grant Mayos Motion on the basis that the
amended regulations are invalid.
BACKGROUND
I. Plaintiffs MFMER and Mayo
Plaintiffs MFMER and Mayo are nonprofit corporations organized in Minnesota
with their principal places of business in Rochester, Minnesota. (Pls. Mem. at 2.)
MFMER is the agent of Mayo for purposes of withholding and remitting FICA taxes and
filing related tax returns. (Pls. Mem. at 2.) MFMER filed the tax return and the refund
claim involved in this case. (Id.)
Mayo operates graduate medical education programs for medical residents and
fellows (residents).2 Most of these programs are formally reviewed and approved by
national accreditation bodies. ( Id.) Residents are enrolled in the programs, register for
1 United States v. Mayo Found. for Med. Educ. & Research, 282 F. Supp. 2d 997 (D. Minn.
2003) (Mayo I), appeal dismissed by stipulation (8th Cir. File No 03-3662, Jan. 7, 2004). In
2006, this Court entered judgment dismissing a tax refund case related to stipends paid to
residents at Mayo for the period of 1997-2003, pursuant to the parties stipulation that the
residents stipends were similarly excluded from FICA tax coverage during those years. See
Mayo Found. for Med. Educ. & Research v. United States (D. Minn. Civ. No. 05-467, judgment
entered May 5, 2006).
2 A resident is an individual who has earned a Doctor of Medicine (M.D.) degree and is
participating in a residency program for additional medical training in a specialty field, such as
internal medicine or surgery. A fellow is an individual who participates in a subspecialty
program that offers more specialized training beyond what is learned in the residency program.
Mayo I, 282 F. Supp. 2d at 999 n.1.
3
courses, attend lectures, perform research, and participate in teaching rounds and
patient care. ( Id.)
Residents 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. (Id.) Mayo pays a stipend to the residents for the purpose of providing a
minimum level of financial support during their enrollment. (Id. at 3.) Finally, residents
receive formal certification upon completion of the programs. ( Id.)
II. An Overview of the FICA Tax
The Federal Insurance Contributions Act (FICA) imposes taxes upon employers
and employees for the support of the social security system. See 26 U.S.C. 3101 et seq.
FICA taxes must be paid on wages. Id. FICA defines wages as all remuneration for
employment, including the cash value of all remuneration (including benefits) paid in any
medium other than cash. 26 U.S.C. 3121(a). Employers collect FICA taxes by
withholding the required amount from their employees wages. See 26 U.S.C. 3102(a).
Employers also pay FICA contributions that equal the amount withheld from their
employees wages. See 26 U.S.C. 3111(a). Thus, FICA taxes are paid in part by
employees through withholding, and in part by employers through an excise tax.
Ahmed v. United States, 147 F.3d 791, 794 (8th Cir. 1998) (quoting United States v. Lee,
455 U.S. 252, 254 n.1 (1982)).
FICA excludes several categories of service from employment, including
service performed in the employ of . . . a school, college, or university . . . if such
4
service is performed by a student who is enrolled and regularly attending classes at such
school, college, or university. 26 U.S.C. 3121(b)(10).
III. Amended Regulations
In February 2004, the Internal Revenue Service (IRS) published a Notice of
Proposed Rulemaking to amend its regulations governing the definition of school,
college, or university and student for purposes of the student-FICA exception under
26 U.S.C. 3121(b)(10). See Student FICA Exception, 69 Fed. Reg. 8604-8606
(proposed Feb. 25, 2004) (codified at 26 C.F.R. 31.3121(b)(10)-2(c),(d)). The IRS
explained that the proposed amendments were designed to address whether services
performed as on-the-job training are excluded from employment under the student-
FICA exception. Id. In particular, the IRS acknowledged that the Eighth Circuit
addressed this issue with respect to medical residents in Minnesota v. Apfel, 151 F.3d
742 (8th Cir. 1998). See 69 Fed. Reg. at 8605. In Apfel, the Eighth Circuit concluded
that services performed by medical residents at the University of Minnesota did not
constitute employment for social security purposes. Apfel, 151. F.3d at 745, 748.
The IRS also explained that the proposed amendments were designed to address
whether an organization carrying on both noneducational and educational activities is a
school, college, or university within the meaning of section 3121(b)(10). See 69 Fed.
Reg. at 8605-06. The IRS indicated that it disagreed with this Courts holding in Mayo I
that Mayo is a school, college, or university for purposes of the exclusion. Id. In
Mayo I, this Court rejected the Governments argument that the primary purpose of an
organization determines whether the organization is a school, college, or university for
5
purposes of the student-FICA exception. Mayo I, 282 F. Supp. 2d at 1013. The Court
reasoned that the IRS opt[ed] instead for a simple and straightforward statement that the
term school, college, or university should be taken in its commonly and generally
accepted sense. Id. Nonetheless, the IRS stated that the proposed amendments would
incorporate the primary function standard in the regulations. 69 Fed. Reg. at 8605-06.
On December 21, 2004, the IRS published its final amended regulations, which
became effective for services performed on or after April 1, 2005.
A. Definition of School, College, or University
The amended regulations provide that:
[a]n organization is a school, college, or university within the meaning of section
3121(b)(10) if its primary function is the presentation of formal instruction, it
normally maintains a regular faculty and curriculum, and it normally has a
regularly enrolled body of students in attendance at the place where its educational
activities are regularly carried on. See section 170(b)(1)(A)(ii) and the regulations
thereunder.
26 C.F.R. 31.3121(b)(10)-2(c) (emphasis added).
By comparison, the pre-amended regulations provided that [t]he term school,
college, or university within the meaning of this exception is to be taken in its commonly
or generally accepted sense. 26 C.F.R. 31.3121(b)(10)-2(d) (Pre-4/1/05 Regulations).
B. Definition of Student
The amended regulations provide that student status (General Rule) is
determined by the relationship of the employee with the organization employing
the employee. 26 C.F.R. 31.3121(b)(10)-2(d). In particular, an employee is a student
if the services he or she provides are incident to and for the purpose of pursuing a course
6
of study. 26 C.F.R. 31.3121(b)(10)-2(d)(3)(i). In addition, [t]he educational aspect
of the relationship between the employer and the employee, as compared to the service
aspect of the relationship, must be predominant in order for the employees services to be
incident to and for the purpose of pursuing a course of study. Id. The educational and
service aspects of the relationship are based on all the relevant facts and
circumstances. Id.
The educational aspect of the relationship is generally evaluated based on the
employees course workload relative to the full-time course workload at the school,
college, or university. 26 C.F.R. 31.3121(b)(10)-2(d)(3)(iv). The service aspect is
evaluated based on the employees normal work schedule, number of hours worked,
whether the employee is a professional or a licensed professional, and whether the
employee is eligible to receive certain kinds of employment benefits. 26 C.F.R.
31.3121(b)(10)-2(d)(3)(v).
C. Full-time Employee Exception
The amended regulations provide that an employee whose normal work schedule
is 40 hours or more per week is considered a full-time employee and therefore services
performed by that individual are not incident to and for the purpose of pursuing a course
of study. 26 C.F.R. 31.3121(b)(10)-2(d)(3)(iii). Also, an employees normal work
schedule is not affected by the fact that the services performed by the employee may
have an educational, instructional, or training aspect. Id. Consequently, a medical
resident who works 40 or more ho urs per week does not qualify for the student exclusion
from FICA taxation.
7
In contrast, the pre-amended regulations provided that student status shall be
determined on the basis of the relationship of such employee with the organization for
which the services are performed. 26 C.F.R. 31.3121(b)(10)-2(c) (Pre-4/1/05
Regulations). Thus, [a]n employee who perform[ed] services in the employ of a school,
college, or university, as an incident to and for the purpose of pursuing a course of study
was a student. Id. The pre-amended regulations did not have a full-time employee
exception.
IV. Mayos Refund Claim
Mayo withheld and paid FICA taxes on the stipends it paid to the residents for
services performed on or after April 1, 2005. Thereafter, Mayo timely filed a refund
claim with the IRS for ,676,118.06. The IRS did not act upon the claim and Mayo
filed this action. See 26 U.S.C. 6532.
STANDARD OF DECISION
Summary judgment is proper if, drawing all reasonable inferences in favor of the
nonmoving party, there is no genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986). The moving party bears the burden of showing that the
material facts in the case are undisputed. Celotex, 477 U.S. at 322; Mems v. City of St.
Paul, Dept of Fire & Safety Servs., 224 F.3d 735, 738 (8th Cir. 2000). The Court must
view the evidence, and the inferences that may be reasonably drawn from it, in the light
most favorable to the nonmoving party. Graves v. Ark. Dept of Fin. & Admin., 229
F.3d 721, 723 (8th Cir. 2000); Calvit v. Minneapolis Pub. Schs., 122 F.3d 1112, 1116
8
(8th Cir. 1997). The nonmoving party may not rest on mere allegations or denials, but
must show through the presentation of admissible evidence that specific facts exist
creating a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256
(1986); Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995).
ANALYSIS
I. Invalidity of Amended Regulations
Mayo argues that the amended regulations are invalid and conflict with the
regulations from the Social Security Administration (Counts One, Four, and Five). Mayo
also argues that the Government is barred by collateral estoppel from re-litigating
whether Mayo is a school, college, or university for purposes of the FICA-tax
exclusion and whether medical residents qualify for the student exclusion (Counts
Two, Three, Six, and Seven). Because the Court finds that the amended regulations are
invalid, it is not necessary to address the collateral-estoppel issue or whether the amended
regulations conflict with the regulations from the Social Security Administration.
A. Secretarys Authority to Issue Regulations
The Secretary of the Treasury may issue two types of regulations: (1) a
legislative regulation pursuant to a specific delegation from Congress; or (2) an
interpretive regulation pursuant to the general authority vested in the Secretary under
section 7805(a) of the Internal Revenue Code. See Tutor-Saliba Corp. v. Commr, 115
T.C. 1, 7 (2000).
Here, the parties agree that the amended regulations are interpretive. The
Secretary has a broad delegation of general authority from Congress to prescribe all
9
needful rules and regulations for the enforcement of [the Internal Revenue Code]. 26
U.S.C. 7805(a); accord United States v. Correll, 389 U.S. 299, 306-07 (1967). However,
the delegated authority is not limitless, as [t]he Secretarys authority to issue regulations
is not the power to make law; it is the power to carry into effect the will of Congress as
expressed in the statute under which the regulations are prescribed. Swallows Holding,
Ltd. v. Commr, 126 T.C. 96, 129 (2006) (citing Manhattan Gen. Equip. Co. v. Commr,
297 U.S. 129, 134-35 (1936)).
B. Review of an Interpretive Tax Regulation
This Courts review of an interpretive tax regulation is governed by the standards
set forth in National Muffler Dealers Assn, Inc. v. United States, 440 U.S. 472 (1979).
In National Muffler, the Supreme Court held that an interpretive regulation is valid if it
implement[s] the congressional mandate in some reasonable manner. Id. at 476
(citation and internal quotations omitted). An interpretive tax regulation is reasonable
only if it harmonizes with the plain language of the statute, its origin, and its purpose.
Id. at 477. The Supreme Court has listed the following factors for determining the
validity of an interpretive regulation:
(1) A regulation may have particular force if it is a substantially
contemporaneous construction of the statute by those presumed to
have been aware of congressional intent.
(2) If the regulation dates from a later period, the manner in which it
evolved merits inquiry.
(3) Other relevant considerations are the length of time the regulation
has been in effect, the reliance placed on it, the consistency of the
Commissioners interpretation, and the degree of scrutiny Congress
10
has devoted to the regulation during subsequent re-enactments of the
statute.
Id. Thereafter, the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984), explained that a court is confronted with two issues
when reviewing an agencys construction of a statute that it administers. First, the court
must determine whether Congress has directly spoken to the precise question at issue. If
the intent of Congress is clear, that is the end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed intent of Congress. Id. at
843-44. If, however, the court determines that Congress has not directly addressed the
precise question at issue, the court does not simply impose its own construction on the
statute, as would be necessary in the absence of an administrative interpretation. Rather,
if the statute is silent or ambiguous with respect to the specific issue, the question for the
court is whether the agencys answer is based on a permissible construction of the
statute. Id. at 844.
Mayo argues that this Courts review of the amended regulations is governed by
National Muffler, because that case, unlike Chevron, dealt with an interpretive tax
regulation. However, the Government argues that Chevron is the proper standard. There
is no indication that the standard in National Muffler was changed by Chevron.
Regardless, the Court reaches the same conclusion under either standard.
C. The Primary Function Test is Invalid (Count 4)
The Court first addresses whether the plain meaning of the term school, college,
or university includes a primary function test under section 3121(b)(10). See
11
Consumer Prod. Safety Commn v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980)
([T]he starting point for interpreting a statute is the language of the statute itself. Absent
a clearly express legislative intention to the contrary, that language must ordinarily be
regarded as conclusive.).
As a threshold matter, section 3121(b)(10) (the Student Exclusion) excludes
several categories of service from employment, including service performed in the
employ of . . . a school, college, or university . . . if such service is performed by a
student who is enrolled and regularly attending classes at such school, college, or
university. 26 U.S.C. 3121(b)(10). The Government argues that the statutory
language of the Student Exclusion is ambiguous.3
The Court finds that this provision is not complicated or filled with technical
language, but is straightforward. See Mayo I, 282 F. Supp. 2d at 1007, 1013 (finding that
the language of 26 U.S.C. 3121(b)(10) is unambiguous); see also United States v.
Mount Sinai Med. Ctr. of Fla., Inc., 486 F.3d 1248, 1251 (11th Cir. 2007) (holding that
the statutory language of 26 U.S.C. 3121(b)(10) is not ambiguous.).
3 The Governments memorandum, cites in a footnote, United States v. Detroit Medical Center,
No. 05-71722, 2006 WL 3497312, at *9 (E.D. Mich. Dec. 1, 2006), for support that the language
of the Student Exclusion is ambiguous. (Defs. Mem. at 3 n.8.) The Government asserted at oral
argument that this Court in Mayo I implicitly found the Student Exclusion to be ambiguous
because it looked to the Treasury Regulations for guidance. (Tr. 19-20.) However, in Mayo I,
this Court expressly determined that the Student Exclusion was not ambiguous and cited to an
extensive factual record as to why Mayo is a school, college, or university for purposes of the
exclusion and why medical residents qualify for the student exclusion from FICA taxation.
Mayo I, 282 F. Supp. 2d at 1007,1013-18. The Governments argument that this Court
implicitly found the Student Exclusion ambiguous is quite puzzling when it expressly determined
that it was not.
12
Mayo argues the ordinary definition of school, college, or university under the
Student Exclusion is not ambiguous and therefore the amended regulations use of the
primary function standard to define school, college, or university is contrary to the
plain meaning of the statute. (Pls. Mem. at 14-15.) The Government argues that the
statute does not define the term school, college, or university and therefore the
language of the statute is ambiguous. (Def.s Mem. at 20.) As such, the Government
asserts that the primary function test helps define whether an organization is a school,
college, or university. (Id.)
Mayo provided the Court with dictionary definitions for the terms school,
college, and university, such as the following: (a) School: an establishment for
teaching a particular skill or group of skills; (b) College: an institution offering
instruction [usually] in a professional, vocational, or technical field; and (c) University:
an institution of higher learning providing facilities for teaching and research and
authorized to grant academic degrees. See Websters New Intl Dictionary 2031, 445,
2502 (3d ed. 1981). Mayo argues that these definitions do not state or imply that
education must be the primary function for an organization to qualify as a school,
college, or university. The Government argues that Mayos use of a dictionary
demonstrates the terms ambiguity and points out that an earlier edition of Websters
dictionary defined school as broadly as [a]ny place or means of learning or discipline;
as, the school of experience and as narrowly as [a] faculty or institution for specialized
higher education, usually within a university; as, a medical or law school; a school of
13
education. See Websters New Intl Dictionary 2236 (2d ed. 1935). The Court is not
persuaded by the Governments argument.
Here, neither of the Governments proffered definitions would exclude Mayo as a
school, college, or university, nor would they suggest that there is a meaning that
excludes an institution based upon its primary function. Thus, the Government has no
basis to argue from the statute or from the dictionary definitions of these words that there
is an ambiguity that supports the Gove rnments atypical definition. A natural reading of
the full text in which the term school, college, or university appears demonstrates that it
is not ambiguous, but is commonly and generally understood. Indeed, the term school,
college, or university has existed with clarity in the statute for over 60 years.
Accordingly, the Court finds that the term school, college, or university is not
ambiguous, but has a well-defined meaning and common usage outside the framework of
the Student Exclusion. The Court recognizes that words in a revenue act generally are
interpreted in their ordinary, everyday senses. Commr v. Soliman, 506 U.S. 168, 174
(1993) (quoting Malat v. Riddell, 383 U.S. 569, 571 (1966) (quoting Crane v. Commr
331 U.S. 1, 6 (1947))); see also Helvering v. Horst, 311 U.S. 112, 118 (1940) (Common
understanding and experience are the touchstones for the interpretation of revenue
laws.). Whether an organization qualifies as a school, college, or university is a
factual inquiry. The Go vernment has presented no compelling argument that the
language in the Student Exclusion has any meaning other than its natural and plain
meaning.
14
The Court next considers the factors set forth in National Muffler: (1) whether the
regulation is a substantially contemporaneous construction of the statute by those
presumed to have been aware of congressional intent; (2) the manner in which a
regulation dating from a later period evolved; (3) the length of time that the regulation
has been in effect; (4) the reliance placed upon the regulation; (5) the consistency of the
Secretarys interpretation; and (6) the degree of scrutiny Congress has devoted to the
regulation during subsequent reenactments of the statute. National Muffler, 440 U.S. at
477.
First, the Student Exclusion was enacted in 1939, and the amended regulations
incorporating the primary function test were issued in 2004, 65 years later.4 Thus, the
disputed regulations are not a substantially contemporaneous construction of the statute
by those presumed to have been aware of congressional intent. Id.
Next, the Court inquires into the manner in which the disputed regulations
evolved. The amended regulations were issued only after this Court rejected the
primary function test. Mayo I, 282 F. Supp. 2d at 1013. In Mayo I, the Court
determined that [a]ctual care in the service of patients is inherent in the educational
process . . . [and] [b]ecause the objective of the resident programs is to ultimately make
physicians capable of caring for patients twenty-four hours a day and seven days a week,
4 The original treasury regulation under the Student Exclusion was adopted in 1940 and did not
include any reference to a primary function test; it remained basically unchanged until the
amended regulations were adopted in 2004. See 5 Fed. Reg. 773, 785-786 (1940). This
regulation was carried over and recodified when the 1954 Code was enacted. 21 Fed. Reg. 1011,
1027 (1956).
15
it is impossible to separate education from patient care. Id. at 1014-15. The Court
concluded that the primary function test did not apply because the plain meaning of the
Student Exclusion was unambiguous.5 Id. at 1007, 1013.
The Government also argues that the Treasurys promulgation of the amended
regulations in response to this Courts decision in Mayo I was permissible under National
Cable & Telecommunications Assn v. Brand X Internet Services, 545 U.S. 967 (2005).6
In Brand X, the Supreme Court held that [a] courts prior judicial construction of a
statute trumps an agency construction otherwise entitled to Chevron deference only if the
prior court decision holds that its construction follows from the unambiguous terms of the
statute and thus leaves no room for agency discretion. Id. at 982. The Court stated that
[o]nly a judicial precedent holding that the statute unambiguously forecloses the
agencys interpretation, and therefore contains no gap for the agency to fill, displaces a
conflicting agency construction. Id. at 982-83. The Supreme Court concluded that the
statutory term offering was ambiguous (based on conflicting dictionary definitions) and
looked to the legislative history in concluding that the agencys interpretation of the
statute was reasonable. Id. at 989-93.
Here, this Court held in Mayo I that the language of the Student Exclusion was
unambiguous. Mayo I, 282 F. Supp. 2d at 1007, 1013. This Court did not look past the
5 The Court further held that even if a primary function test applied, Mayo satisfied that test
because it is a non-profit institution having as its charitable purposes medical education and
scientific research. [Mayo] operates five medical schools and . . . spends more on medical
education and research than it receives from patient care. Mayo I, 282 F. Supp. 2d at 1013 n.30.
6 It is not clear whether the Supreme Courts decision in Brand X, which neither cited National
Muffler nor involved an interpretive tax regulation, applies to federal tax regulations; this Court
does not decide that question.
16
plain language of the statute because when the statutes language is plain, the sole
function of the courts at least where the disposition required by the text is not absurd
is to enforce it according to its terms. Hartford Underwriters, Inc. v. Union Planters
Bank, 530 U.S. 1, 6 (2000) (citations and internal quotations omitted). The language of
the Student Exclusion is clear; if Congress desires to use the primary function test as
the standard for defining school, college, or university then Congress will have to make
that change. See CBS Inc. v. Primetime 24 Joint Venture, 245 F.3d 1217, 1228 (11th Cir.
2001) ([I]f Congress really meant in 1005(a)(2)(B)(iii) of the Improvement Act to
grandfather only involuntary terminations resulting from court orders, then why did it say
any termination? Why not simply say any involuntary termination or any termination
resulting from court orders? It could have easily done so, but it did not.).
Furthermore, the amended regulations have only been in effect for approximately
two years. Thus, it is unlikely that any party has substantially relied upon them. Also,
the primary function test is inconsistent with the long-standing interpretation of the
Student Exclusion by the IRS.7 Finally, Congress has not amended the Student
Exclusion since the amended regulations were adopted and therefore has not had an
opportunity to scrutinize them.
7 The Student Exclusion was enacted in 1939 and the IRS never indicated that the primary
function test should be applied in defining school, college, or university until 2001, when the
IRS released a chief counsel advice memorandum taking that position. See IRS CCA
200145040 (Nov. 9, 2001).
17
For these reasons, the Court finds that the primary function test is inconsistent
with the plain meaning of the statute and is invalid. Accordingly, the Court grants
Mayos request for summary judgment on Count Four of its Complaint.
D. The Full-Time Employee Exception is Invalid (Count One)
Mayo also argues that the full-time employee exception is invalid because it is
inconsistent with the plain meaning of the statute and is arbitrary, capricious, and
unreasonable. In particular, Mayo argues that the definition of student is clear and
unambiguous. The Government, however, asserts that the definition of student is
ambiguous and argues that the term student is so general that a rule categorically
denying student status to a full-time employee is a permissible and reasonable
interpretation.8
The amended regulations provide that an employee is a student if the services he
or she performs are incident to and for the purpose of pursuing a course of study at the
employer organization and the educational aspect of the relationship between the
employer and employee predominates over the service aspect of the relationship. 26
C.F.R. 31.3121(b)(10)-2(d)(3)(i). However, an employee whose normal work
schedule is 40 hours or more per week is considered a full-time employee and therefore
8 The Government also argues that a bright- line rule is necessary to address whether services in
the nature of on-job-training qualify for the student-FICA exception. (Def.s Mem. at 28.) The
Court disagrees. The Governments characterization of a residency program as on-the-job
training misses the mark and ignores the fact that residents apply to and enroll in a residency
program for an educational purpose. See Mayo I, 282 F. Supp. 2d at 1017. Indeed, Mayos
residency program provides a formal and structured educational program where residents register
for courses, attend lectures, perform research, and participate in teaching rounds and patient
care. (Nelson Aff. 3.)
18
the services of a full-time employee are not incident to and for the purpose of pursuing a
course of study. 26 C.F.R. 31.3121(b)(10)-2(d)(3)(iii).
The Court finds that the term student is not ambiguous. The word student is
well defined and commonly understood outside the context of the Student Exclusion.
The dictionary defines student as an individual who engages in study and is enrolled
in a class or course in a school, college, or university. Websters New Intl Dictionary
2268 (3d ed. 1981); see also Oxford Universal Dictionary 2049-50 (3d ed. 1955) (a
student is an individual who engages in study by applying the mind to the
acquisition of learning, whether by means of books, observation, or experiment). A
natural reading of the full text in which the term student appears demonstrates that an
employee is a student so long as the educational aspect of his service predominates
over the service aspect of the relationship with his employer. The statutory language of
the Student Exclusion excludes from employment service performed in the employ of a
school, college, or university . . . if such service is performed by a student who is enrolled
and regularly attending classes at such school, college, or university. 26 U.S.C.
3121(b)(10) (emphasis added). Thus, Congress already put its limitations on the word
student those limitations only require a student to be enrolled and regularly attending
classes. Congress did not put any limitation on student with regard to how much that
individual might be working in some ancillary capacity.
The full-time employee exception arbitrarily narrows this definition by providing
that a full-time employee is not a student even if the educational aspect of an
employees service predominates over the service aspect. Accordingly, the Court finds
19
that the full-time employee exception is inconsistent with the plain meaning of the statute
and the expressed intent of Congress.9 The Court also finds that the regulatory
distinction between the General Rule for determining student status and the full-time
employee exception ignores the educational aspect of student services (no matter how
central to the program in which the student is enrolled) merely because the services are
performed by an individual who works more than 40 hours per week. Indeed, it denies
student status to medical residents even though the services they provide are primarily
for educational purposes and essential to becoming fully qualified physicians. The
Government has failed to show that Congress intended to ignore the educational value of
such services in applying the Student Exclusion. Accordingly, the Court determines that
the full-time employee exception of the amended regulations is invalid because it
arbitrarily restricts the ordinary meaning of student.
The factors set forth in National Muffler also indicate that the full-time employee
exception is invalid. First, the exception is not a substantially contemporaneous
construction of the Student Exclusion because this amended regulation was added 65
years after the Student Exclusion was enacted.
Second, the exception was adopted only after adverse decisions from the Eighth
Circuit and this Court. In Mayo I, this Court stated that the student-status test is
comparable to the implementing regulation the Eighth Circuit considered in Apfel, which
9 [I]t is not reasonable for the Secretary (or anyone else for that matter) to construe a statutes
unambiguous meaning in a manner contrary to that intended by Congress in passing the
legislation. Swallows Holding, 126 T.C. at 147.
20
held that the proper analysis requires a case-by-case examination to determine whether
the residents relationship with the organization was primarily for educational purposes
or primarily to earn a living. Apfel, 151 F.3d at 748 (emphasis added). In Mayo I, this
Court found that the residents were clearly enrolled in a residency program and were
regularly attending classes.10 Mayo I, 282 F. Supp. 2d at 1015-17. The Court concluded
that the residents relationship with Mayo was primarily for educational purposes. Id. at
1018. In addition, the decisions in Apfel and Mayo I rejected the Governments
argument that courts should defer to a bright-line rule that medical residents can never
be exempted from FICA taxation as students.11 Id. at 1007. Yet, that is exactly what the
full-time employee exception does.
Third, this exception has only been in effect for two years, and it is unlikely that
any party has substantially relied upon it. Furthermore, the full-time employee exception
is inconsistent with the IRSs long-standing interpretation of the Student Exclusion,
which has applied a facts-and-circumstances approach and not a bright-line rule that
10 The record in Mayo I showed that the residency programs included (1) core curriculum
conferences, (2) primary care conferences, (3) grand rounds, (4) morbidity and mortality
conferences, and (5) journal clubs . . . . Attendance at the conferences and teaching rounds was
mandatory . . . and the residents performance in each subject matter rotation was evaluated,
graded, and recorded on the residents transcripts. Mayo I, 282 F. Supp. 2d at 1016-17.
11 See also Mount Sinai, 486 F.3d at 1252-53 (rejecting Governments assertion that courts
should defer to a bright- line rule that medical residents can never qualify for the FICA
exemption as students); Ctr. for Family Med. v. United States, 456 F. Supp. 2d 1115, 1119
(D.S.D. 2006) (rejecting Governments argument that medical residents are never students as a
matter of law).
21
categorically denies student status.12 Finally, Congress has not amended the Student
Exclusion since the amended regulations were adopted and therefore has not had an
opportunity to scrutinize them.
The Court finds that the full-time employee exception is invalid because it is
inconsistent with the plain meaning of the statute and is arbitrary, capricious, and
unreasonable. Accordingly, Mayo is entitled to summary judgment on Count One of its
Complaint.
II. Governments Rule 56(f) Request
The Government asserts that it has not conducted any discovery regarding Mayo s
medical program or its medical residents for the tax period relevant to this lawsuit the
second quarter of 2005. In particular, the Government argues that if this Court
invalidates the regulations, then it will need to conduct discovery on the second quarter of
2005, and thus opposes Mayos Motion under Rule 56(f) of the Federal Rules of Civil
Procedure.
Rule 56(f) allows a party to request a delay in granting summary judgment if the
party can make a good faith showing that postponement of the ruling would enable it to
discover additional evidence which might rebut the movants showing of the absence of a
12 See, e.g., Rev. Proc. 98-16, 1998-1 C.B. 403 (explaining that an individual who does not
qualify for student-FICA exclusion under the standards applicable to undergraduate and graduate
students may qualify on the basis of all the facts and circumstances.); IRS CCA 200029030
(July 21, 2000) (determination of the status of [medical residents] as students requires
examination of the facts and circumstances . . . A per se position that medical residents are not
students within the meaning of 3121(b)(10) would be inconsistent with the regulations . . . .)
IRS CCA 200212029 (Mar. 22, 2002) (whether medical residents are students depends upon the
facts and circumstances in each case.).
22
genuine issue of material fact. Robinson v. Terex Corp., 439 F.3d 465, 467 (8th Cir.
2006) (citing Fed. R. Civ. P. 56(f)); accord Small Bus. Admin. v. Light, 766 F.2d 394,
397-98 (8th Cir. 1985)). In particular, Rule 56(f) requires the party opposing summary
judgment to file an affidavit with the district court showing what specific facts additional
discovery might uncover. Dulany v. Carnahan, 132 F.3d 1234, 1238 (8th Cir. 1997).
Thus, the party opposing the motion for summary judgment may not simply rely
on vague assertions that additional discovery will produce needed, but unspecified,
facts. SEC v. Spence & Green Chem. Co., 612 F.2d 896, 901 (5th Cir. 1980).
Similarly, a court will deny a Rule 56(f) request if the discovery sought is cumulative or
the party merely hopes or has a hunch that evidence will emerge. 10B Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure 2741(3d ed. 1998). As
such, if a party fails to carry its burden under Rule 56(f), postponement of a ruling on a
motion for summary judgment is unjustified. Humphreys v. Roche Biomed. Labs., Inc.,
990 F.2d 1078, 1081 (8th Cir. 1993).
Here, the Governments affidavit in support of its Rule 56(f) request falls short of
these requirements. The Government asserts that it needs to conduct discovery to
determine whether material facts are in dispute as to three broad categories: (1) whether
the Mayo residents perform services in the employ of the Foundation; (2) whether the
Foundation is a school; and (3) whether the Mayo residents are student[s] enrolled
and regularly attending classes at the Foundation. (Pahl Aff. 14.) The Government
indicated that it disputes the facts set forth in [Mayos supporting] affidavit relating to
each of these three categories for the second quarter of 2005. (Pahl Aff. 16.)
23
However, the facts needed to decide this Motion were subject to discovery in
Mayo I. Also, as part of the 2006 settlement of the 1997-2003 litigation, the Government
accepted Mayos supporting affidavit dated June 10, 2005, which is similar to the
affidavit filed by Mayo in support of this Motion. (Pls. Reply Mem. at 13-14.) The
affidavit i n support of Mayos Motion is very detailed and indicates that the facts in this
case compared to the previous cases between the parties are essentially identical. (Nelson
Aff. 1-37.) The Governments supporting affidavit does not allege any specific
material factual dispute, but merely asserts that discovery may help determine if there
is a genuine issue of material fact regarding Mayos medical program or its medical
residents for the second quarter of 2005. (Pahl Aff. 11-13, 17.)
The Court finds that the Governments affidavit contains only conclusory
assertions regarding any factual dispute and fails to show what specific facts additional
discovery might uncover it amounts to nothing more than vague assertions that
additional discovery will produce needed, but unspecified, facts. Consequently, the
Government has failed to show how discovery will provide rebuttal to Mayos claims.
The Court also finds that the Governments Rule 56(f) request essentially seeks an
advisory opinion before it determines whether discovery is necessary. Here, the
Government argues that it will need to conduct discovery on the second quarter of 2005
only [i]f the Court invalidates the regulations. (Def.s Mem. at 50 (emphasis added).)
However, Rule 56(f) permits a party opposing summary judgment to seek a continuance
and postpone a summary judgment decision until adequate discovery has been
completed. Dulany, 132 F.3d at 1238 (emphasis added). If the Government truly
24
believed that discovery was necessary in this case, then it could have asked this Court to
postpone its decision. It did not. Therefore, the Court denies the Governments Rule
56(f) request.
CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED that:
1. Plaintiffs Motion for Summary Judgment (Doc. No. 11) is GRANTED IN
PART as follows:
a. Plaintiffs Motion is GRANTED as to Counts One and Four of its
Complaint; Plaintiffs are entitled to a refund of FICA taxes withheld
and paid in the amount of ,676,118.06, plus interest; and
b. Counts Two, Three, Five, Six and Seven of Plaintiffs Complaint are
DISMISSED WITHOUT PREJUDICE.
2. Defendants Rule 56(f) request is DENIED.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Date: August 3 , 2007
s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge
 

 
 
 

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