U.S. v. Mayo Foundation for Medical Education

Decision Date04 August 2003
Docket NumberNo. Civ.01-1121 RHK/SRN.,Civ.01-1121 RHK/SRN.
PartiesUNITED STATES of America, Plaintiff, v. MAYO FOUNDATION FOR MEDICAL EDUCATION AND RESEARCH, and Mayo Foundation, Defendants.
CourtU.S. District Court — District of Minnesota

Gerald Leedom and Jennifer Brown, United States Department of Justice, Tax Division, Washington, D.C., for Plaintiff.

Thomas W. Tinkham and John Windhorst, Dorsey & Whitney, P.L.L.P., Minneapolis, Minnesota, for Defendants.

MEMORANDUM OPINION AND ORDER FOR JUDGMENT

KYLE, District Judge.

Introduction

The United States commenced this action to recover approximately $4.1 million paid as a refund to Defendants Mayo Foundation for Medical Education and Research ("MFMER") and the Mayo Foundation ("the Foundation") in 1999. That refund represents taxes originally collected from Defendants under the Federal Insurance Contributions Act ("FICA" or "the Act"), 26 U.S.C. §§ 3101 et seq., on stipends paid to residents and fellows of the Mayo Graduate School of Medicine ("MGSM") in calendar year 1995.1 Defendants asserted a counterclaim seeking a refund of FICA taxes paid with respect to stipends awarded to residents in calendar years 1994 and 1996.2 The refunds sought for 1994 and 1996 are approximately $3.4 million and $4.5 million, respectively. Defendants claim that the stipends should not have been subject to FICA taxation because the patient-care services rendered by the residents in connection with those stipends were not within the Act's definition of "employment." Defendants allege that the residents' services fall within a "student" employment exception to FICA taxation.

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1340, 1345, 1346(a)(1) and 26 U.S.C. §§ 7402(a) and 7405. This matter was tried before the undersigned without a jury on May 20, 21, and 22, 2003. This Memorandum Opinion and Order for Judgment is based on the admissible evidence introduced at trial, the Court's observations of the witnesses, and its determinations regarding the weight to be afforded their testimony; it also constitutes the Court's findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52(a).

Background
I. An Overview of the FICA Tax

FICA taxes support the Social Security system, that "form of social insurance ... whereby persons gainfully employed, and those who employ them, are taxed to permit the payment of benefits to the retired and disabled, and their dependents." Flemming v. Nestor, 363 U.S. 603, 609, 80 S.Ct. 1367, 4 L.Ed.2d 1435 (1960). Section 3101(a) of the Internal Revenue Code imposes FICA taxes on "wages"3 received by an individual "with respect to employment." 26 U.S.C. § 3101(a). There are two subcategories of FICA taxes: a 1.45% tax that supports Medicare, and a 6.2% tax that supports "old age, survivor, and disability insurance." (Trial Tr. at 15.)

Employers collect FICA taxes by withholding the required amount from their employees' wages. See 26 U.S.C. § 3102(a). Employers themselves also pay a FICA contribution in an amount equaling that 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, 102 S.Ct. 1051, 71 L.Ed.2d 127 (1982)). Defendants' refund claims for 1994 and 1996 involve both the employer's portion of the FICA taxes and, where individual residents have consented to have a claim brought on their behalf, the employee portion as well. (See Trial Tr. at 15-16.)

II. Defendants Mayo Foundation for Medical Education and Research ("MFMER") and Mayo Foundation ("the Foundation")

The Foundation is a Minnesota nonprofit corporation having its principal place of business in Rochester, Minnesota. (See Defs.' Ex. 236.) It is also a tax-exempt organization under § 501(c)(3) of the Internal Revenue Code, having as its charitable purposes medical education and scientific research. (See Defs.' Ex. 313.) It is the parent corporation for all of the outpatient, inpatient, education, and research activities at all Mayo sites. (Pl.'s Ex. 18 at 1.) The Foundation is composed of distinct, but fully integrated, operational units which, in the mid 1990s, included:

. Mayo Clinic Rochester (encompassing Saint Mary's Hospital and Rochester Methodist Hospital);

. Mayo Medical School;4

. Mayo Graduate School;

. Mayo School of Health-Related Sciences;

. Mayo Graduate School of Medicine;

. Mayo School of Continuing Medical Education;

. Mayo Clinic Jacksonville, in Florida; and

. Mayo Clinic Scottsdale, in Arizona.

(Id.) The Court finds that, thus, the Foundation operates five educational institutions.

The Mayo Foundation Education Committee coordinates the activities of the several Mayo schools, having final authority over all educational matters. (Id. at 8.) The deans of the Medical School, the Graduate School, the Graduate School of Medicine, the School of Health Sciences, and the School of Continuing Medical Education are members of the Foundation's Education Committee. (Id. at 21.)

The vast majority of the full-time physicians on the staff of the Mayo Clinics are also faculty of one or more of the Foundation's schools. (See Trial Tr. at 139, 152-53, 213; Pl.'s Ex. 18 at 39.) All staff physicians (and, therefore, all faculty) are employed and paid by the Foundation. (Pl.'s Ex. 18 at 22.) The staff physicians are not paid an additional amount to serve as faculty. (Trial Tr. at 152.) Appointments to the faculty of the various schools at Mayo are made by the Foundation's Academic Appointments and Promotions Committee that, in making appointments, utilizes written guidelines outlining the achievements necessary to be appointed as, or achieve promotion to, an instructor or professor at Mayo. (Id. at 115-16.)

First accredited by the North Central Association of Colleges and Schools in 1984 (Pl.'s Ex. 18 at 2), the Foundation— through the Mayo Medical School and the Mayo Graduate School, respectively— grants M.D. and Ph.D. degrees. (Trial Tr. at 87.) The Foundation—through the Mayo Graduate School of Medicine ("MGSM")—also awards certificates to individuals completing residency and fellowship programs.5 (Defs.' Exs. 286 at Bates No. F-016, 287 at Bates No. MC-081, and 288 at Bates No. F-044; Trial Tr. at 129, 236, 303, 331-32.) The Foundation provided residents in the mid 1990s with substantial facilities and resources, including an Office of Minority Student Affairs, a Health Service, professional counseling, one of the largest medical libraries in North America, computer facilities, laboratories, and classrooms. (Pl.'s Ex. 18 at 10; Trial Tr. at 142-44, 334-40.) Each school, including the MGSM, had an academic and student affairs office. (Pl.'s Ex. 18 at 10.)

Defendant MFMER is a Minnesota nonprofit corporation having its principal place of business in Rochester, Minnesota. (Defs.' Ex. 243.) MFMER is the agent of the Foundation under 26 U.S.C. § 3504 for purposes of withholding and remitting FICA taxes and filing related tax returns. (Defs.' Ex. 334.) MFMER is also the paying agent for most Mayo entities and disburses stipends to residents.6

III. The Mayo Graduate School of Medicine ("the MGSM")

The MGSM is an unincorporated division, or operating unit, of the Foundation.7 (Trial Tr. at 86, 111.) In the mid 1990s, the goals and purposes of the MGSM were

• to provide educational programs of excellence to prepare physicians and scientists for the practice of medicine, medical research and medical education in the United States and abroad;

• to support and enhance the quality, the efficiency, and the intellectual stimulation of medical practice at Mayo;

• to educate a sufficient number of physicians and scientists in preparation for appointment to the staff of Mayo Foundation and to contribute to national needs;8 and

• to expand educational programs in response to changing needs in proper relationship to the growth of clinical practice at all Mayo Group Practices;

(Pl.'s Ex. 18 at 16; see also id. at 72.) In 1994, the Accreditation Council on Graduate Medical Education ("the ACGME") accredited MGSM as an institution for graduate medical education for a period of five years.9 (Id. at 6; Trial Tr. at 332.) Approximately ninety percent of the residency programs at the MGSM have been reviewed and approved by ACGME residency review committees. (Trial Tr. at 322-23, 325-27.)

From 1994 through 1996, the MGSM offered approximately 150 residency and fellowship programs in various medical specialties and sub-specialties at three locations: (1) Rochester, Minnesota; (2) Jacksonville, Florida; and (3) Scottsdale, Arizona. (See Trial Tr. at 326-28.) Each year approximately 1,000 residents participate in MGSM residency programs. (Id.) The length of a residency program is generally three to seven years. (See Defs.' Ex. 202 at EA4.01, 275 & 276.) Between 1994 and 1996, most of the residency programs, and therefore the majority of the residents, were based in Rochester.10 The residency programs span virtually all of the recognized specialty areas, from broad generalist areas, such as Family Medicine and General Internal Medicine, to highly specialized areas in which only one person trains at a time. (Pl.'s Ex. 18 at 39.)

The MGSM is administered by an Education Committee consisting of faculty and staff from Rochester, Jacksonville, and Scottsdale. (Trial Tr. at 177.) The MGSM Education Committee oversees all of the educational activities at all three sites and reports to the Foundation Education Committee. (Id.; Pl.'s Ex. 18 at 8.) It sets policies and standards governing the operation of the residency programs and recommends to the Foundation's Education Committee the level at which residents' stipends and benefits should be set. (Defs.' Ex. 201, 280 & 282-85.) A separate...

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    ...Bureau Life Ins. Co., 291 F.3d 718, 721 (11th Cir.2002) (describing the FICA tax generally); United States v. Mayo Found. for Med. Educ. & Research, 282 F.Supp.2d 997, 999-1000 (D.Minn.2003) (same). There are, however, numerous relationships that are exempted from FICA taxation by statutory......
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1 firm's commentaries
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