[Federal Register Volume 69, Number 37 (Wednesday, February 25, 2004)]
[Proposed Rules]
[Pages 8604-8613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-156421-03]
RIN 1545-BC81


Student FICA Exception

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding the meaning of ``school, college, or university'' 
and ``student'' for purposes of the student FICA exception under 
sections 3121(b)(10) and 3306(c)(10)(B) of the Internal Revenue Code 
(Code). In addition, this document contains proposed regulations that 
provide guidance on the meaning of ``school, college, or university'' 
for purposes of the FICA exception under section 3121(b)(2) for 
domestic service performed in a local college club, or local chapter of 
a college fraternity or sorority by a student. This document also 
provides a notice of public hearing on these proposed regulations.

DATES: Written and electronic comments must be received by May 25, 
2004. Outlines of topics to be discussed at the public hearing 
scheduled for June 16, 2004 must be received by May 25, 2004.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-156421-03), room 
5703, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
156421-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically, via the IRS Internet site at: www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John Richards of the Office of Associate Chief Counsel (Tax Exempt and 
Government Entities), (202) 622-6040; concerning submissions of 
comments, the hearing and/or to be placed on the building access list 
to attend the hearing, Treena Garret, (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to 26 CFR part 31 under 
sections 3121(b)(10) and 3306(c)(10)(B) of the Internal Revenue Code. 
These sections except from ``employment'' for Federal Insurance 
Contributions Act (FICA) tax purposes and Federal Unemployment Tax Act 
(FUTA) purposes, respectively, 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. In addition, this document contains proposed 
amendments to 26 CFR part 31 under section 3121(b)(2). This section 
excepts from employment for FICA purposes domestic service performed in 
a local college club, or local chapter of a college fraternity or 
sorority, by a student who is enrolled and is regularly attending cases 
at a school, college, or university.

Explanation of Provisions

A. Current Law

    Section 3121(b)(10) of the Code (the student FICA exception) 
excepts from the definition of employment for FICA purposes services 
performed in the employ of a school, college, or university (SCU) 
(whether or not that organization is exempt from income tax), or an 
affiliated organization that satisfies section 509(a)(3) of the Code in 
relation to the SCU (``related section 509(a)(3) organization''), if 
the service is performed by a student who is enrolled and regularly 
attending classes at that SCU. Section 3306(c)(10)(B) contains a 
similar student exception. Thus, the student FICA exception applies to 
services only if both the ``SCU status'' and ``student status'' 
requirements are met. This regulation deals with both the SCU status 
and student status requirements.
    To satisfy the SCU status requirement, the employer for whom the 
employee performs services (the common law employer) must be either a 
SCU or a related section 509(a)(3) organization. If a student is not 
employed by a SCU or a related section 509(a)(3) organization, then the 
student FICA exception is not available. See e.g., Rev. Rul. 69-519

[[Page 8605]]

(1969-2 C.B. 185) (holding that students attending an apprenticeship 
school established pursuant to an agreement between a union and a 
contractors' association were employees of the participating 
contractors to whom the students were assigned.) Section 
31.3121(b)(10)-2(d) of the Employment Tax Regulations provides that the 
term ``SCU'' for purposes of the student FICA exception is to be 
construed in its ``commonly or generally accepted sense.''
    To satisfy the student status requirement, the employee must meet 
three requirements. First, under section 3121(b)(10), the employee must 
be a student enrolled and regularly attending classes at the SCU 
employing the student. Second, the employee must be pursuing a course 
of study at the SCU employing the student. Third, the employee must be 
``[a]n employee who performs services in the employ of a [SCU] as an 
incident to and for the purpose of pursuing a course of study at such 
[SCU]. * * *'' Reg. Sec.  31.3121(b)(10)-2(c). The IRS's position has 
been that whether services are incident to and for the purpose of 
pursuing a course of study depends on two factors: the employee's 
course workload and the nature of the employee's employment 
relationship with the employer. See e.g., Rev. Proc. 98-16 (1998-1 C.B. 
403); Rev. Rul. 78-17 (1978-1 C.B. 306).

B. Need for Regulations

    Treasury and IRS have determined that it is necessary to provide 
additional clarification of the terms ``SCU'' and ``student who is 
enrolled and regularly attending classes'' as they are used in section 
3121(b)(10). In recent years the question has arisen whether the 
performance of certain services that are in the nature of on the job 
training are excepted from employment under the student FICA exception. 
This issue was presented with respect to medical residents and interns 
in State of Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998), which 
concluded that services performed by medical residents and interns are 
not employment for social security purposes. The question also applies 
to services performed by employees in other fields, particularly 
regulated fields, where on the job training is often required to gain 
licensure. Guidance is needed to address situations where the 
performance of services and pursuit of the course of study are not 
separate and distinct activities, but instead are to some extent 
intermingled.
    Section 3121(a) defines ``wages'' as ``all remuneration for 
employment. * * *'' Under section 3121(b), ``employment'' means ``any 
service * * * performed * * * by an employee for the person employing 
him.'' The Social Security Act provides nearly identical definitions of 
``wages'' and ``employment.'' 42 U.S.C. sections 409(a)(1)(I); 410(a). 
``The very words `any service * * * performed * * * for his employer,' 
with the purpose of the Social Security Act in mind, import a breadth 
of coverage.'' Social Security Board v. Nierotko, 327 U.S. 358, 365 
(1946). The courts have generally found that the terms ``wages'' and 
``employment'' as used in both the social security benefits and FICA 
tax provisions are to be interpreted broadly. State of New Mexico v. 
Weinberger, 517 F.2d 989, 993 (10th Cir. 1995); Mayberry v. United 
States, 151 F.3d 855, 860 (8th Cir. 1998); Moorhead v. United States, 
774 F.2d 936, 941 (9th Cir. 1985); Abrahamsen v. United States, 228 
F.3d 1360, 1364 (Fed. Cir. 2000). The broad interpretation of these 
terms results from the underlying purpose of the Social Security Act, 
namely, ``to provide funds through contributions by employer and 
employee for the decent support of elderly workmen who have ceased to 
labor.'' Nierotko, 327 U.S. at 364. See also St. Luke's Hospital v. 
United States, 333 F.2d 157, 164 (6th Cir. 1964) (``[I]n dealing with 
the beneficent purposes of the Social Security Act, this court 
generally favors that interpretation of statutory provisions which 
calls for coverage rather than exclusion.'').
    Wage and employment questions affect both social security benefits 
entitlement and FICA taxes which fund the social security trust fund. 
Except in unusual circumstances, the Social Security Act, and the 
Internal Revenue FICA provisions, are to be read in pari materia. 
United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 213 
(2001). Thus, whether certain service is employment affects not just 
FICA taxation, but also social security benefits eligibility and level 
of benefits. Moreover, the integrity of the social security system 
requires symmetry between service that is considered employment for 
social security benefits purposes and employment for FICA taxation 
purposes.
    Resolution of this issue has significant social security benefits 
and FICA tax implications. The case of medical residents illustrates 
the possible effect on individuals and the social security system as a 
whole of excepting service in the nature of on the job training from 
employment for social security benefits and FICA tax purposes. The 
Social Security Administration (SSA) reported to the General Accounting 
Office (GAO) that ``[b]ecause many residents are married and have 
children and work as residents for up to 8 years, an exemption from 
Social Security coverage could have a very significant effect on their 
potential disability benefits or their family's survivor benefits.'' 
Moreover, SSA reported that if medical residents were determined to be 
students for purposes of the student FICA exception, 270,000 medical 
residents would lose some coverage over the next ten years (2001 
through 2010).\1\
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    \1\ GAO Report B-284947, Health, Education, and Human Services 
Division, Social Security: Coverage For Medical Residents (August 
31, 2000).
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    This regulation addresses two issues: (1) Whether an organization 
carrying on educational activities in connection with the performance 
of services is a SCU within the meaning of section 3121(b)(10), and (2) 
whether certain employees performing services in the nature of on the 
job training have the status of a student who is enrolled and regularly 
attending classes for purposes of section 3121(b)(10).

C. Whether an Organization Carrying on Educational Activities Is a SCU

    Organizations providing on the job training typically carry on both 
noneducational and educational activities. The issue is whether 
organizations carrying on both noneducational and educational 
activities are SCUs within the meaning of section 3121(b)(10). For 
example, organizations such as hospitals typically carry on both 
educational and noneducational activities. In United States v. Mayo 
Foundation, 282 F. Supp. 2d 997 (D. Minn. 2003), the United States 
argued, consistent with the position it has maintained 
administratively, that the primary purpose of an organization 
determines whether the organization is a SCU for purposes of the 
student FICA exception. The court rejected this argument, finding it 
inconsistent with the common sense standard. The court stated, ``If the 
[IRS] had intended the term `SCU' in Sec.  3121(b)(10) to have the same 
scope and meaning as `educational institution' (found in Sec.  
170(b)(1)(A)(ii) * * * ), it could have clearly and explicitly given 
the phrase such scope and meaning by cross-referencing those Code 
provisions and their implementing regulations.'' Although Treasury and 
IRS disagree with the interpretation of the district court, the 
Secretary understands and is responding to the court's view by more 
clearly incorporating the primary purpose standard in regulations.

[[Page 8606]]

    This regulation provides that the character of an organization as a 
SCU or not as a SCU is determined by its primary function. The primary 
function standard is consistent with the language of section 
3121(b)(10) and the existing regulations thereunder, and is consistent 
with the intended scope of the student FICA exception as reflected in 
the legislative history accompanying the Social Security Amendments of 
1939 and 1950.
    Section 170(b)(1)(A) of the Code defines various classes of 
organizations for charitable deduction purposes. All of the 
organizations have some combination of charitable, educational, 
religious and/or cultural purposes. The definitions distinguish them 
into categories based on various criteria. One such class defined in 
section 170(b)(1)(A)(ii) is for any ``educational organization which 
normally maintains a regular faculty and curriculum and normally has a 
regularly enrolled body of pupils or students in attendance at the 
place where its educational activities are regularly carried on.''

    Section 1.170A-9(b)(1) of the Income Tax Regulations provides:
    An educational organization is described in section 
170(b)(1)(A)(ii) if its primary function is the presentation of 
formal instruction and it normally maintains a regular faculty and 
curriculum and normally has a regularly enrolled body of pupils or 
students in attendance at the place where its educational activities 
are regularly carried on. The term includes institutions such as 
primary, secondary, preparatory, or high schools, and colleges and 
universities. It includes Federal, State, and other public-supported 
schools which otherwise come within the definition. It does not 
include organizations engaged in both educational and noneducational 
activities unless the latter are merely incidental to the 
educational activities. A recognized university which incidentally 
operates a museum or sponsors concerts is an educational 
organization within the meaning of section 170(b)(1)(A)(ii). 
However, the operation of a school by a museum does not necessarily 
qualify the museum as an educational organization within the meaning 
of this subparagraph.

    Thus, in order to qualify as an educational organization under 
section 170(b)(1)(A)(ii), it is not enough that the organization 
carries on educational activities; instead, the organization's primary 
function must be to carry on educational activities.
    The section 170(b)(1)(A)(ii) standard applies to the organization 
as a whole, an approach that is consistent with Sec.  31.3121(b)(10)-
2(b) of the regulations, which provides that one of ``[t]he statutory 
tests [is] the character of the organization in the employ of which the 
services are performed as a [SCU] * * *. '' Thus, the character of the 
organization determines whether it is a SCU, not merely whether the 
organization carries on some educational activities. Further, section 
3121(b) provides that ``the term `employment' means any service * * * 
performed * * * by an employee for the person employing him,'' and 
Sec.  31.3121(d)-2 of the regulations provides that ``every person is 
an employer if he employs one or more employees.'' Under section 
7701(a)(1), the term ``person'' means any individual, trust, estate, 
association, or corporation. Thus, the character of the person 
employing the employee--the legal entity recognized for federal tax 
purposes--determines whether the SCU status requirement is met, not 
merely the character of a division or function of the employer.
    In addition, the primary function standard reaches a result 
consistent with the ``commonly or generally accepted sense'' standard 
of the existing regulation (Sec.  31.3121(b)(10)-2(d)). In common 
parlance, the term ``hospital'' is used to describe an organization 
with the primary function of caring for patients. The term ``museum'' 
is used to describe an organization with the primary function of 
maintaining a collection and displaying it to the public in a way that 
will educate them about the collection and related concepts. A hospital 
or a museum may conduct educational activities, even classes or 
possibly even certificate or degree programs, but the activities which 
define them in the public mind are patient care and maintenance and 
display of a collection. An organization bears the label ``school'' 
when its primary function is the conduct of classes for an identified 
set of students leading to the awarding of a credential demonstrating 
mastery of some subject matter.
    Finally, defining the term ``SCU'' to include institutions whose 
primary function is other than to carry on educational activities could 
lead to expansion of the student FICA exception beyond what Congress 
intended. When Congress enacted the student FICA exception in 1939, and 
amended it in 1950, it contemplated that the exception would be limited 
in scope. The House Report to the Social Security Amendments of 1939 
states the following in describing the purpose of the student FICA and 
other exceptions:

    In order to eliminate the nuisance of inconsequential tax 
payments the bill excludes certain services performed for fraternal 
benefit societies and other nonprofit institutions exempt from 
income tax, and certain other groups. While the earnings of a 
substantial number of persons are excluded by this recommendation, 
the total amount of earnings involved is undoubtedly very small * * 
*. The intent of this amendment is to exclude those persons and 
those organizations in which the employment is part-time or 
intermittent and the total amount of earnings is only nominal, and 
the payment of tax is inconsequential and a nuisance. The benefit 
rights built up are also inconsequential. Many of those affected, 
such as students and the secretaries of lodges, will have other 
employment which will enable them to develop insurance benefits. 
This amendment, therefore, should simplify the administration for 
the worker, the employer, and the Government.

H.R. Rep. No. 728, 76th Cong. 1st Sess. (1939), 1939-2 C.B. 538, 543. 
The Senate Report uses similar language. S. Rep. No. 734, 76th Cong. 
1st Sess. 19 (1939), 1939-2 C.B. 565, 570.
    The House Report to the Social Security Amendments of 1950 
continued to describe the exception as a matter of administrative 
convenience not meaningfully affecting social security benefits:

    The bill would continue to exclude service performed for nominal 
amounts in the employ of tax-exempt nonprofit organizations,\2\ 
service performed by student nurses and internes [sic],\3\ and 
service performed by students in the employ of colleges and 
universities. These exclusions simplify administration without 
depriving any significant number of people of needed protection.
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    \2\ The general exception from employment for services performed 
for non-profit organizations was repealed in 1983 by Public Law 98-
21, section 102(b).
    \3\ The Social Security Amendments of 1965 repealed the student 
intern exception under Sec.  3121(b)(13). See discussion infra.

H.R. Rep. No. 1300, 81st Cong. 1st Sess. 12 (1949). The Senate Report 
contains similar language. S. Rep. No. 1669, 81st Cong. 2d Sess. 15 
(1950). Defining ``SCU'' to include organizations whose primary purpose 
is not to carry on educational activities would create a broad 
exception contrary to what Congress intended. Accordingly, the term 
``SCU'' should not be interpreted so broadly as to include 
organizations whose primary function is other than to carry on 
educational activities.

D. Whether Certain Employees Are Students

    This regulation clarifies who is a student enrolled and regularly 
attending classes for purposes of section 3121(b)(10). The existing 
regulations at Sec.  31.3121(b)(10)-2(c) provide that an employee will 
have the status of student only if the services are performed ``as an 
incident to and for the purpose of pursuing a course of study'' at the 
SCU.

[[Page 8607]]

Thus, to qualify for the exception, the individual's predominant 
relationship with the SCU must be as a student, and only secondarily or 
incidentally as an employee.
    Where an individual's employment and educational activities are 
separate and distinct, the extent and nature of the respective 
activities determine whether the employment or student aspect of the 
relationship with the SCU is predominant. See Rev. Proc. 98-16. In the 
vast majority of cases the service and the course of study are separate 
and distinct activities; for example, the biology major's service in 
the cafeteria is unrelated to his course of study. By contrast, some 
employees' services are arguably part of a course of study; for 
example, the services of a medical resident are necessary to receive a 
certificate in a medical specialty. The standards in Rev. Proc. 98-16--
whether the employee has at least a half-time course workload, and 
whether the employee is eligible to receive certain employee benefits--
are inadequate to determine student status in such circumstances. Where 
the services performed by the individual for the SCU are also earning 
the individual credit toward an educational credential, the 
determination of whether the employment relationship is the predominant 
relationship with the SCU must be based on other factors. This 
regulation is intended to provide standards to determine student status 
in such cases.
    This regulation is intended to further Congress's intent regarding 
those eligible for the student FICA exception as reflected by the 
legislative history to the Social Security Amendments of 1939. 
Consistent with Congress's intent, the student FICA exception covers 
individuals earning small amounts who are expected to accumulate social 
security benefits through future employment that will follow the 
completion of their education. Thus, in the typical case, a student 
will earn a modest amount while devoting his primary time and attention 
to classes and study.
    This regulation provides clarification in three respects. First, it 
describes what the individual must be doing to be considered enrolled 
and regularly attending classes. In order to be a class, the activity 
must be more than an activity that gives the individual an opportunity 
to acquire new skills and knowledge. It must involve instructional 
activities, and be led by a knowledgeable faculty member following an 
established curriculum for identified students. Classes can include 
much more than traditional classroom-based instruction, but the faculty 
leadership, the set curriculum, and the prescribed time frame are 
essential.
    Second, this regulation provides standards for determining whether 
an employee is pursuing a course of study. The regulation provides that 
one or more courses conducted by a SCU the completion of which fulfills 
the requirements to receive an educational credential granted by the 
SCU is a course of study.
    Third, this regulation provides standards for determining whether 
an employee's services are incident to and for the purpose of pursuing 
a course of study. The regulation provides in general that whether the 
employee's services are incident to and for the purpose of pursuing a 
course of study depends on all the facts and circumstances. This 
determination is made by comparing the educational aspect of the 
relationship between the employer and the employee with the service 
aspect of the relationship. The regulation provides that the employee's 
course workload is used to measure the scope of the educational aspect 
of the relationship. A relevant factor is the employee's course 
workload relative to a full-time course workload. The regulation 
further provides that where an employee has the status of a career 
employee, the services performed by the employee are not incident to 
and for the purpose of pursuing a course of study.
    This regulation specifies various aspects of an individual's 
employment relationship with the SCU which cause conclusively the 
individual to have the status of a ``career employee.''
    This regulation provides that the criteria used to identify an 
employee as having the status of a career employee are (1) the 
employee's hours worked, (2) whether the employee is a ``professional 
employee,'' (3) the employee's terms of employment, and (4) whether the 
employee is required to be licensed in the field in which the employee 
is performing services. The hours worked criteria reflects 
Congressional intent to limit the student FICA exception to services 
performed by those individuals who are predominantly students. 
Employees who are working enough hours to be considered full-time 
employees (40 hours or more per week) have filled the conventional 
measure of available time with work, and not study. Even if they are 
capable of balancing a full-time job with a heavy course load, they are 
earning wages at a level that exceeds Congress's intended scope for the 
student FICA exception. The IRS's long-standing position is that hours 
worked is a relevant factor in determining whether an employee has 
student status. Rev. Rul. 78-17 (1978-1 C.B. 306) (holding that whether 
an employee has student status is determined by hours worked relative 
to credits taken); Rev. Rul. 66-285 (1966-2 C.B. 455) (holding that 
services of an employee employed full-time are not incident to and for 
the purpose of pursuing a course of study). Rev. Rul. 85-74 (1985-1 
C.B. 331), dealing with the student nurse exception, uses an hours 
worked standard. The student nurse exception and the student FICA 
exception share the same legislative history. The IRS's use of an hours 
worked standard was found to be a reasonable interpretation of the 
legislative history in Johnson City Medical Center v. United States, 
999 F.2d 973 (6th Cir. 1993).
    The regulation provides that a ``professional employee'' has the 
status of a career employee, and thus his services are not incident to 
a course of study. The standards defining a professional employee for 
purposes of this regulation closely follow existing Department of Labor 
standards defining certain professional employees. See 29 U.S.C. 
213(a); and 29 CFR 541.3(a)(1), (b), (c), (d). Section 213(a) and the 
regulations thereunder provide that certain employees are exempt from 
the minimum wage and overtime laws. This regulation provides that a 
professional employee for purposes of the student FICA exception is an 
employee whose primary duty consists of the performance of services 
requiring knowledge of an advanced type in a field of science or 
learning, whose work requires the consistent exercise of discretion and 
judgment in its performance, and whose work is predominantly 
intellectual and varied in character. The services of employees 
exhibiting these characteristics are not incident to a course of study.
    This regulation provides that an employee's terms of employment may 
also cause an employee to have the status of a career employee. A list 
of terms is provided, any one of which causes the employee to have the 
status of a career employee. On the list are terms of employment that 
provide for eligibility to receive certain employee benefits typically 
associated with career employment, such as eligibility to participate 
in certain types of retirement plans or tuition reduction arrangements. 
The notion of a career employee standard based on eligibility to 
receive certain fringe benefits was recommended by the higher education 
community for purposes of guidance that was issued in Rev. Proc. 98-16, 
and Treasury and IRS believe it is an appropriate standard to use for 
purposes

[[Page 8608]]

of identifying employees whose services are not incident to and for the 
purpose of pursuing a course of study. Rev. Proc. 98-16 provides that 
career employee status precludes application of the safe harbor 
standard, but leaves the possibility that the employee could have the 
status of a student based on all the facts and circumstances. In 
contrast, this regulation provides that an employee considered as 
having the status of a career employee based on eligibility to receive 
certain employee benefits does not have the status of a student for 
purposes of the student FICA exception.
    Finally, this regulation provides that an employee who must be 
licensed by a government entity in order to perform a certain function 
has the status of a career employee. An employee who is required to be 
licensed to perform the services must have received sufficient prior 
instruction and demonstrated sufficient mastery of the activity to 
receive the license. Furthermore, licensed workers typically earn more 
than a modest amount for their work to reflect their expertise. As 
discussed, the legislative history indicates that the student FICA 
exception is intended to cover individuals earning a small amount of 
wages prior to entry into meaningful post-education employment. The 
exception is not intended to cover an individual who has developed 
enough expertise to be working in a field where he or she is already 
licensed and has the capacity to earn substantial wages.
    The IRS requests comments on the criteria used to identify an 
employee as having the status of a career employee. In particular, the 
IRS requests comments on the licensure criterion and whether this 
criterion should be further refined or clarified.
    IRS and Treasury believe that Congress has shown the specific 
intent to provide social security coverage to individuals who work long 
hours, serve as highly skilled professionals, and typically share some 
or all of the terms of employment of career employees, particularly 
medical residents and interns. The Social Security Amendments of 1939 
added section 1426(b)(13) to the Code (later redesignated section 
3121(b)(13)), which provided an exception from social security coverage 
for ``service performed as an intern in the employ of a hospital by an 
individual who has completed a 4 year course in a medical school 
chartered or approved pursuant to State law.'' The House Report 
accompanying the legislation provides:

    Paragraph 13 excepts service performed as a student nurse in the 
employ of a hospital or a nurse's training school by an individual 
who is enrolled and is regularly attending classes * * *; and 
service performed as an interne [sic] (as distinguished from a 
resident doctor) in the employ of a hospital by an individual who 
has completed a four years' course in a medical school chartered or 
approved pursuant to State law.

H.R. Rep. No. 728, 76th Cong. 1st Sess. 49 (1939), 1939-2 C.B. 538, 
550-51 (emphasis added); see also S. Rep. No. 734, 76th Cong. 1st Sess. 
58, 1939-2 C.B. 565, 578. Thus, the services of medical interns were 
excepted from FICA, but the services of resident doctors were not.
    Twenty-five years later, in St. Luke's Hospital v. United States, 
333 F.2d 157 (6th Cir. 1964), the Sixth Circuit confirmed that section 
3121(b)(13) of the Code applied to medical interns, but that medical 
residents were not specifically excepted from social security coverage. 
St. Luke's claimed a refund of FICA taxes for the years 1953 through 
1958 based on the student intern exception under section 3121(b)(13). 
The refund claims were computed based upon the remuneration paid to 
medical school graduates in their second or subsequent year of clinical 
training. The court held that the services of medical residents were 
not excluded under the medical intern exception.
    In 1965, one year after the St. Luke's decision, Congress amended 
the Code to repeal the special exemption for medical interns. The 
legislative history underlying the Social Security Amendments of 1965 
(Public Law 89-97) suggests that Congress intended that medical interns 
be covered by FICA just as medical residents already were. The House 
Report states:

    Coverage would also be extended to services performed by medical 
and dental interns. The coverage of services as an intern would give 
young doctors an earlier start in building up social security 
protection and would help many of them to become insured under the 
program at the time when they need the family survivor and 
disability protection it provides. This protection is important for 
doctors of medicine who, like members of other professions, in the 
early years of their practice, may not otherwise have the means to 
provide adequate survivorship and disability protection for 
themselves and their families. Interns would be covered on the same 
basis as other employees working for the same employers, beginning 
on January 1, 1966.

H.R. Rep. No. 213, 89th Cong. 1st Sess. 95 (1965).
    The Senate Report states:

    Section 3121(b)(13) of the Internal Revenue Code of 1954 
excludes from the term ``employment,'' and thus from coverage under 
the [FICA], services performed as an intern in the employ of a 
hospital by an individual who has completed a 4-year course in a 
medical school . . . . Section 311(b)(5) of the bill amends section 
3121(b)(13) so as to remove this exclusion. The effect of this 
amendment is to extend coverage under the [FICA] to such interns 
unless their services are excluded under provisions other than 
section 3121(b)(13). Thus, the services of an intern are covered if 
he is employed by a hospital which is not exempt from income tax as 
an organization described in section 501(c)(3) of the Code.

S. Rep. No. 404, 89th Cong. 1st Sess. 237-38 (1965). The last sentence 
makes indirect reference to the exclusion from FICA for services 
performed for exempt organizations under section 3121(b)(8)(B) of the 
1954 Code. That exclusion was repealed by the Social Security 
Amendments of 1983 (Public Law 98-21). Nothing in the legislative 
history indicates that Congress believed interns (or residents, who 
were even further along in their medical careers than interns) were 
eligible for the student FICA exception.
    In addition to revoking the medical intern exception, section 311 
of the Social Security Amendments of 1965, entitled, ``Coverage for 
Doctors of Medicine,'' changed the law in two other ways affecting 
medical doctors. First, section 1402(c)(5) of the 1954 Code was amended 
to eliminate the exception for physician services from the definition 
of ``trade or business,'' thus subjecting these services to self-
employment tax. Second, section 3121(b)(6)(C)(iv) of the 1954 Code, 
which provided an exception from the definition of employment for 
``service performed in the employ of the United States if the service 
is performed by any individual as an employee included under Sec.  
5351(2) of title 5, [U.S.C.], (relating to certain interns, student 
nurses, and other student employees of hospitals of the Federal 
Government),'' was amended by adding, ``other than as a medical or 
dental intern or a medical or dental resident in training.'' These 
provisions, taken together, indicate Congress's intent to create a 
scheme under which all medical doctors are covered under the social 
security system, whether or not they are still in training, whether or 
not they are self-employed, or whether or not they work for the federal 
government.

E. Effect on Rev. Proc. 98-16

    Several years ago, representatives of higher education asked the 
IRS and Treasury for guidance on the application of the student FICA 
exception. Colleges and universities were particularly interested in 
guidance relating to students who had on-campus jobs that were 
completely separate and

[[Page 8609]]

distinct from their course work. In response, the IRS issued Rev. Proc. 
98-16, which sets forth standards for determining whether services 
performed by students in the employ of certain institutions of higher 
education qualify for the exception from FICA tax provided under 
section 3121(b)(10). The revenue procedure provided answers to many 
longstanding questions.
    The revenue procedure addresses different circumstances than those 
prompting the need for the clarifications provided in this proposed 
regulation. It provides a safe harbor that applies where the student's 
course work and the student's employment are separate activities, and 
are not intermingled. In clarifying the regulations interpreting 
section 3121(b)(10), the IRS and Treasury fully intend to retain the 
safe harbor in the revenue procedure. However, several discrete aspects 
of the safe harbor need to be updated to align with the proposed 
regulations. Thus, in conjunction with this notice of proposed 
rulemaking, the IRS is suspending Rev. Proc. 98-16 and proposing to 
replace it with a new revenue procedure that is revised in limited ways 
to align with the proposed regulations. See Notice 2004-12, to be 
published in I.R.B. 2004-10 (March 8, 2004). Taxpayers may rely on the 
proposed revenue procedure until final regulations and a final revenue 
procedure are issued. Also, the public is invited to comment on the 
proposed revenue procedure.

F. Related Proposed Amendments

    Section 3306(c)(10)(B) of the Code excepts from ``employment'' for 
FUTA tax purposes services performed by a student who is enrolled and 
regularly attending classes at a SCU. This regulation provides that the 
standards that apply in determining whether an employer is a SCU and 
whether an employee is a student for purposes of section 3121(b)(10) 
also apply for purposes of section 3306(c)(10)(B). In addition, this 
regulation provides that the standards that apply for purposes of 
determining whether an employer is a SCU for purposes of section 
3121(b)(10) also apply for purposes of section 3121(b)(2) (excluding 
from employment for FICA purposes domestic services performed for local 
college clubs, fraternities, and sororities by students who are 
enrolled and regularly attending classes).

G. Proposed Effective Date

    It is proposed that these regulations apply to services performed 
on or after February 25, 2004.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. In addition, 
because no collection of information is imposed on small entities, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do 
not apply, and, therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(f) of the Code, this notice of 
proposed rulemaking will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on the impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments that 
are submitted timely to the IRS. The IRS and Treasury Department 
request comments on all aspects of the proposed regulations and how 
they can be made easier to understand. All comments will be available 
for public inspection and copying.
    A public hearing is scheduled for June 16, 2004, beginning at 10 
a.m. in room 2615 of the Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. All visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments by May 25, 2004 and submit an outline of the topics to 
be discussed and the time to be devoted to each topic (signed original 
and eight (8) copies). A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of these proposed regulations is John Richards 
of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt 
and Government Entities). However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Reporting and 
recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31--EMPLOYMENT TAXES

    Paragraph 1. The authority citation for part 31 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In Sec.  31.3121(b)(2)-1, paragraph (d) is revised to read 
as follows:


Sec.  31.3121(b)(2)-1  Domestic service performed by students for 
certain college organizations.

* * * * *
    (d) A school, college, or university is described in section 
3121(b)(2) 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.
* * * * *
    Par. 3. Section 31.3121(b)(10)-2 is amended by: adding a heading 
for paragraphs (a) and (b), revising paragraphs (c) and (d), 
redesignating paragraph (e) as paragraph (g), and adding paragraphs (e) 
and (f).
    The revisions and additions read as follows:


Sec.  31.3121(b)(10)-2  Services performed by certain students in the 
employ of a school, college, or university, or of a nonprofit 
organization auxiliary to a school, college, or university.

    (a) General rule. (1) * * *
    (b) Statutory tests. * * *
    (c) School, College, or University. A school, college, or 
university is described in 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

[[Page 8610]]

attendance at the place where its educational activities are regularly 
carried on. See section 170(b)(1)(A)(ii) and the regulations 
thereunder.
    (d) Student Status--general rule. Whether an employee has the 
status of a student performing the services shall be determined based 
on the relationship of the employee with the organization for which the 
services are performed. In order to have the status of a student, the 
employee must perform services in the employ of a school, college, or 
university described in paragraph (c) of this section at which the 
employee is enrolled and regularly attending classes in pursuit of a 
course of study within the meaning of paragraphs (d)(1) and (2) of this 
section. In addition, the employee's services must be incident to and 
for the purpose of pursuing a course of study within the meaning of 
paragraph (d)(3) of this section at such school, college, or 
university. An employee who performs services in the employ of an 
affiliated organization described in paragraph (a)(2) of this section 
must be enrolled and regularly attending classes at the affiliated 
school, college, or university within the meaning of paragraph (c) of 
this section in pursuit of a course of study within the meaning of 
paragraphs (d)(1) and (2) of this section. In addition, the employee's 
services must be incident to and for the purpose of pursuing a course 
of study within the meaning of paragraph (d)(3) of this section at such 
school, college, or university.
    (1) Enrolled and regularly attending classes. An employee must be 
enrolled and regularly attending classes at a school, college, or 
university within the meaning of paragraph (c) of this section at which 
the employee is employed to have the status of a student within the 
meaning of section 3121(b)(10). An employee is enrolled within the 
meaning of section 3121(b)(10) if the employee is registered for a 
course or courses creditable toward an educational credential described 
in paragraph (d)(2) of this section. In addition, the employee must be 
regularly attending classes to have the status of a student. For 
purposes of this paragraph (d)(1), a class is an instructional activity 
led by a knowledgeable faculty member for identified students following 
an established curriculum. Traditional classroom activities are not the 
sole means of satisfying this requirement. For example, research 
activities under the supervision of a faculty advisor necessary to 
complete the requirements for a Ph.D. degree may constitute classes 
within the meaning of section 3121(b)(10). The frequency of events such 
as these determines whether the employee may be considered to be 
regularly attending classes.
    (2) Course of study. An employee must be pursuing a course of study 
in order to have the status of a student. A course of study is one or 
more courses the completion of which fulfills the requirements 
necessary to receive an educational credential granted by a school, 
college, or university within the meaning of paragraph (c) of this 
section. For purposes of this paragraph, an educational credential is a 
degree, certificate, or other recognized educational credential granted 
by an organization described in paragraph (c) of this section. In 
addition, a course of study is one or more courses at a school, college 
or university within the meaning of paragraph (c) of this section the 
completion of which fulfills the requirements necessary for the 
employee to sit for an examination required to receive certification by 
a recognized organization in a field.
    (3) Incident to and for the purpose of pursuing a course of study. 
An employee's services must be incident to and for the purpose of 
pursuing a course of study in order for the employee to have the status 
of a student. Whether an employee's services are incident to and for 
the purpose of pursuing a course of study shall be determined on the 
basis of the relationship of such employee with the organization for 
which such services are performed. The educational aspect of the 
relationship, as compared to the service aspect of the relationship, 
must be predominant in order for the employee's services to be incident 
to and for the purpose of pursuing a course of study. The educational 
aspect of the relationship between the employer and the employee is 
established by the employee's course workload. The service aspect of 
relationship is established by the facts and circumstances related to 
the employee's employment. In the case of an employee with the status 
of a career employee within the meaning of paragraph (d)(3)(ii) of this 
section, the service aspect of the relationship with the employer is 
predominant. Standards applicable in determining whether an employee's 
services are considered to be incident to and for the purpose of 
pursuing a course of study are provided in paragraphs (d)(3)(i) and 
(ii) of this section.
    (i) Course workload. The educational aspect of an employee's 
relationship with the employer is evaluated based on the employee's 
course workload. Whether an employee's course workload is sufficient in 
order for the employee's employment to be incident to and for the 
purpose of pursuing a course of study generally depends on the 
particular facts and circumstances. A relevant factor in evaluating an 
employee's course workload is the employee's course workload relative 
to a full-time course workload at the school, college or university 
within the meaning of paragraph (c) of this section at which the 
employee is enrolled and regularly attending classes.
    (ii) Career employee status. Services of an employee with the 
status of a career employee are not incident to and for the purpose of 
pursuing a course of study. An employee has the status of a career 
employee if the employee is described in paragraph (d)(3)(ii)(A), (B), 
(C) or (D) of this section.
    (A) Hours worked. An employee has the status of a career employee 
if the employee regularly performs services 40 hours or more per week.
    (B) Professional employee. An employee has the status of a career 
employee if the employee is a professional employee. A professional 
employee is an employee--
    (1) Whose primary duty consists of the performance of work 
requiring knowledge of an advanced type in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction and study, as distinguished from a general 
academic education, from an apprenticeship, and from training in the 
performance of routine mental, manual, or physical processes.
    (2) Whose work requires the consistent exercise of discretion and 
judgment in its performance; and
    (3) Whose work is predominantly intellectual and varied in 
character (as opposed to routine mental, manual, mechanical, or 
physical work) and is of such character that the output produced or the 
result accomplished cannot be standardized in relation to a given 
period of time.
    (C) Terms of employment. An employee with the status of a career 
employee includes any employee who is--
    (1) Eligible to receive vacation, sick leave, or paid holiday 
benefits;
    (2) Eligible to participate in any retirement plan described in 
section 401(a) that is established or maintained by the employer, or 
would be eligible to participate if age and service requirements were 
met;
    (3) Eligible to participate in an arrangement described in section 
403(b), or would be eligible to participate if age and service 
requirements were met;
    (4) Eligible to participate in a plan described under section 
457(a), or

[[Page 8611]]

would be eligible to participate if age and service requirements were 
met;
    (5) Eligible for reduced tuition (other than qualified tuition 
reduction under section 117(d)(5) provided to a teaching or research 
assistant who is a graduate student) because of the individual's 
employment relationship with the institution;
    (6) Eligible to receive employee benefits described under sections 
79 (life insurance), 127 (qualified educational assistance), 129 
(dependent care assistance programs), or 137 (adoption assistance); or
    7) Classified by the employer as a career employee.
    (D) Licensure status. An employee is a career employee if the 
employee is required to be licensed under state or local law to work in 
the field in which the employee performs services.
    (e) Examples. The following examples illustrate the principles of 
paragraphs (c) and (d) of this section:

    Example 1. (i) Employee C is employed by State University T to 
provide services as a clerk in T's administrative offices, and is 
enrolled and regularly attending classes at T in pursuit of a B.S. 
degree in biology. C has a course workload which constitutes a full-
time course workload at T. C performs services on average 20 hours 
per week, but from time to time works 40 hours or more during a 
week. C receives only hourly wages and no other pay or benefits. C 
is not required under state or local law to be licensed to perform 
the services for T.
    (ii) In this example, C is employed by T, a school, college, or 
university within the meaning of paragraph (c) of this section. C is 
enrolled and regularly attending classes at T in pursuit of a course 
of study. C's hours worked do not cause C to have the status of a 
career employee, even though C may occasionally work 40 hours or 
more during a week. C's part-time employment relative to C's full-
time course workload indicates that C's services are incident to and 
for the purpose of pursuing a course of study. C is not a 
professional employee, and C's terms of employment and licensure 
status do not cause C to have the status of a career employee within 
the meaning of paragraph (d)(3)(ii) of this section. Thus, C has the 
status of a student. Accordingly, C's services are excepted from 
employment under section 3121(b)(10).
    Example 2. (i) Employee D is employed in the accounting 
department of University U, and is enrolled and regularly attending 
classes at U in pursuit of an M.B.A. degree. D has a course workload 
which constitutes a half-time course workload at U. D's work does 
not require the consistent exercise of discretion and judgment, and 
is not predominantly intellectual and varied in character. D 
regularly performs services full-time (40 hours per week), and is 
eligible to participate in a retirement plan described in section 
401(a) maintained by U.
    (ii) In this example, D is employed by U, a school, college, or 
university within the meaning of paragraph (c) of this section. In 
addition, D is enrolled and regularly attending classes at U in 
pursuit of a course of study. However, D has the status of a career 
employee because D regularly works 40 hours per week, and is 
eligible to participate in U's section 401(a) retirement plan. 
Because D has the status of a career employee within the meaning of 
paragraph (d)(3)(ii) of this section, D's services are not incident 
to and for the purpose of pursuing a course of study. Accordingly, 
D's services are not excepted from employment under section 
3121(b)(10).
    Example 3. (i) Employee E is employed by University V to provide 
patient care services at a teaching hospital that is an 
unincorporated division of V. These services are performed as part 
of a medical residency program in a medical specialty sponsored by 
V. The residency program in which E participates is accredited by 
the Accreditation Council for Graduate Medical Education. Upon 
completion of the program, E will receive a certificate of 
completion, and be eligible to sit for an examination required to be 
certified by a recognized organization in the medical specialty. E 
regularly performs services more than 40 hours per week. E's patient 
care services require knowledge of an advanced type in the field of 
medicine, and are predominantly intellectual and varied in 
character. Further, although E is subject to supervision, E's 
services require the consistent exercise of discretion and judgment 
regarding the treatment of patients. In addition, E receives 
vacation, sick leave, and paid holiday benefits; and salary deferral 
benefits under an arrangement described in section 403(b). E is a 
first-year resident, and thus is not eligible to be licensed to 
practice medicine under the laws of the state in which E performs 
services.
    (ii) In this example, E is employed by V, a school, college, or 
university within the meaning of paragraph (c) of this section. 
However, because of E's hours worked, professional employee status, 
and employee benefits, E has the status of a career employee within 
the meaning of paragraph (d)(3)(ii) of this section. Thus, E's 
services are not incident to and for the purpose of pursuing a 
course of study. Accordingly, E's services are not excepted from 
employment under section 3121(b)(10).
    Example 4. (i) Employee F is employed in the facilities 
management department of University W. F has a B.S. degree in 
engineering, and is completing the work experience required to sit 
for an examination to become a professional engineer eligible for 
licensure under state or local law. F is not attending classes at W 
in pursuit of a course of study leading to an educational 
credential. F regularly performs services 40 hours or more per week. 
F receives certain employee benefits including vacation, sick leave, 
and paid holiday benefits. F also receives retirement benefits under 
an arrangement described in section 457.
    (ii) In this example, F is employed by W, a school, college, or 
university within the meaning of paragraph (c) of this section. 
However, F is not enrolled and regularly attending classes at W in 
pursuit of a course of study. F's work experience is not a course of 
study for purposes of paragraph (d)(2) of this section. In addition, 
because of F's hours worked and employment benefits, F has the 
status of a career employee within the meaning of paragraph 
(d)(3)(ii) of this section. Thus, F's services are not incident to 
and for the purpose of pursuing a course of study. Accordingly, F's 
services are not excepted from employment under section 3121(b)(10).
    Example 5. (i) Employee G is employed by Employer X as an 
apprentice in a skilled trade. X is a subcontractor providing 
services in the field in which G wishes to specialize. G is pursuing 
a certificate in the skilled trade from Community College C. G is 
performing services for X pursuant to an internship program 
sponsored by C under which its students gain experience, and receive 
credit toward a certificate in the trade.
    (ii) In this example, G is employed by X. X is not a school, 
college or university within the meaning of paragraph (c) of this 
section. Thus, the exception from employment under section 
3121(b)(10) is not available with respect to G's services for X.
    Example 6. (i) Employee H is employed by a cosmetology school Y 
at which H is enrolled and regularly attending classes in pursuit of 
a certificate of completion. Y's primary function is to carry on 
educational activities to prepare its students to work in the field 
of cosmetology. Prior to issuing a certificate, Y requires that its 
students gain experience in cosmetology services by performing 
services for the general public on Y's premises. H performs services 
less than 40 hours per week. H's work does not require knowledge of 
an advanced type in a field of science or learning, nor is it 
predominantly intellectual and varied in character. H receives 
remuneration in the form of hourly compensation from Y for providing 
cosmetology services to clients of Y, and does not receive any other 
compensation or benefits. H is not required to be a licensed 
cosmetologist in the state in which H performs services while 
participating in the training program.
    (ii) In this example, H is employed by Y, a school, college or 
university within the meaning of paragraph (c) of this section, and 
is enrolled and regularly attending classes at Y in pursuit of a 
course of study. In addition, because H works less than 40 hours per 
week, H is not a professional employee, and H's terms of employment, 
and licensure status do not indicate that H has the status of a 
career employee, H is not a career employee within the meaning of 
paragraph (d)(3)(ii) of this section. Thus, H's services are 
incident to and for the purpose of pursuing a course of study. 
Accordingly, H's services are excepted from employment under section 
3121(b)(10).
    Example 7. (i) Employee J is a teaching assistant at University 
Z. J is enrolled and regularly attending classes in pursuit of a 
graduate degree at Z. J has a course workload which constitutes a 
full-time course workload at Z. J performs services less than 40 
hours per week. J's duties include grading quizzes, providing class 
and laboratory instruction pursuant to a lesson plan developed by 
the professor, and preparing laboratory equipment for 
demonstrations. J

[[Page 8612]]

receives no employee benefits. J receives a cash stipend and a 
qualified tuition reduction within the meaning of section 117(d)(5) 
for the credits earned for being a teaching assistant. J is not 
required under state or local law to be licensed to perform the 
activities of a teaching assistant.
    (ii) In this example, J is employed as a teaching assistant by 
Z, a school, college, or university within the meaning of paragraph 
(c), and is enrolled and regularly attending classes at Z in pursuit 
of a course of study. J's full-time course workload relative to J's 
employment workload indicates that J's services are incident to and 
for the purpose of pursuing a course of study. J is not a 
professional employee because J's work does not require the 
consistent exercise of discretion and judgment in its performance. 
In addition, J's terms of employment and licensure status do not 
cause J to have the status of a career employee within the meaning 
of paragraph (d)(3)(ii) of this section. Thus, J has the status of a 
student. Accordingly, J services are excepted from employment under 
section 3121(b)(10).
    (f) Effective date. Paragraphs (c), (d) and (e) of this section 
apply to services performed on or after February 25, 2004.
* * * * *
    Par. 4. In Sec.  31.3306(c)(10)-2:
    1. Paragraph (c) is revised.
    2. Paragraphs (d) and (e) are added.
    The revision and addition read as follows:


Sec.  31.3306(c)(10)-2  Services of student in employ of a school, 
college, or university.

* * * * *
    (c) General rule. (1) For purposes of this section, the tests are 
the character of the organization in the employ of which the services 
are performed and the status of the employee as a student enrolled and 
regularly attending classes at the school, college, or university 
described in paragraph (c)(2) of this section, in the employ of which 
he performs the services. The type of services performed by the 
employee, the place where the services are performed, and the amount of 
remuneration for services performed by the employee are not material.
    (2) School, college, or university. A school, college, or 
university is described in section 3306(c)(10)(B) if its primary 
function is the presentation of formal instruction, and 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.
    (d) Student Status--general rule. Whether an employee has the 
status of a student within the meaning of section 3306(c)(10)(B) 
performing the services shall be determined based on the relationship 
of the employee with the organization for which the services are 
performed. In order to have the status of a student, the employee must 
perform services in the employ of a school, college, or university 
described in paragraph (c)(2) of this section at which the employee is 
enrolled and regularly attending classes in pursuit of a course of 
study within the meaning of paragraphs (d)(1) and (2) of this section. 
In addition, the employee's services must be incident to and for the 
purpose of pursuing a course of study at such school, college, or 
university within the meaning of paragraph (d)(3) of this section.
    (1) Enrolled and regularly attending classes. An employee must be 
enrolled and regularly attending classes at a school, college, or 
university within the meaning of paragraph (c)(2) of this section at 
which the employee is employed to have the status of a student within 
the meaning of section 3306(c)(10)(B). An employee is enrolled within 
the meaning of section 3306(c)(10)(B) if the employee is registered for 
a course or courses creditable toward an educational credential 
described in paragraph (d)(2) of this section. In addition, the 
employee must be regularly attending classes to have the status of a 
student. For purposes of this paragraph (d)(1), a class is a didactic 
activity in which a faculty member plays a leadership role in 
furthering the objectives of an established curriculum. Traditional 
classroom activities are not the sole means of satisfying this 
requirement. The frequency of events such as these determines whether 
the employee may be considered to be regularly attending classes.
    (2) Course of study. An employee must be pursuing a course of study 
in order to have the status of a student within the meaning of section 
3306(c)(10)(B). A course of study is one or more courses the completion 
of which fulfills the requirements necessary to receive an educational 
credential granted by a school, college, or university within the 
meaning of paragraph (c)(2) of this section. For purposes of this 
paragraph, an educational credential is a degree, certificate, or other 
recognized educational credential granted by an organization described 
in paragraph (c)(2) of this section. In addition, a course of study is 
one or more courses at a school, college or university within the 
meaning of paragraph (c)(2) of this section the completion of which 
fulfills the requirements necessary for the employee to sit for an 
examination required to receive certification by a recognized 
organization in a field.
    (3) Incident to and for the purpose of pursuing a course of study. 
An employee's services must be incident to and for the purpose of 
pursuing a course of study in order for the employee to have the status 
of a student within the meaning of section 3306(c)(10)(B). Whether an 
employee's services are incident to and for the purpose of pursuing a 
course of study shall be determined on the basis of the relationship of 
such employee with the organization for which such services are 
performed. The educational aspect of the relationship, as compared to 
the service aspect of the relationship, must be predominant in order 
for the employee's services to be incident to and for the purpose of 
pursuing a course of study. The educational aspect of the relationship 
between the employer and the employee is established by the employee's 
course workload. The service aspect of relationship is established by 
the facts and circumstances related to the employee's employment. In 
the case of an employee with the status of a career employee, the 
service aspect of the relationship with the employer is predominant. 
Standards applicable in determining whether an employee's services are 
considered to be incident to and for the purpose of pursuing a course 
of study are provided in paragraphs (d)(3)(i) and (ii) of this section.
    (i) Course workload. The educational aspect of an employee's 
relationship with the employer is evaluated based on the employee's 
course workload. Whether an employee's course workload is sufficient 
for the employee's employment to be incident to and for the purpose of 
pursuing a course of study generally depends on the particular facts 
and circumstances. A relevant factor in evaluating the employee's 
course workload is the employee's course workload relative to a full-
time course workload at the school, college or university within the 
meaning of paragraph (c)(2) of this section at which the employee is 
enrolled and regularly attending classes.
    (ii) Career employee status. Services of an employee with the 
status of a career employee are not incident to and for the purpose of 
pursuing a course of study. An employee has the status of a career 
employee if the employee is described in paragraph (d)(3)(ii)(A), (B), 
(C), or (D) of this section.
    (A) Hours worked. An employee has the status of a career employee 
if the employee regularly performs services 40 hours or more per week.

[[Page 8613]]

    (B) Professional employee. An employee has the status of a career 
employee if the employee is a professional employee. A professional 
employee is an employee--
    (1) Whose primary duty consists of the performance of work 
requiring knowledge of an advanced type in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction and study, as distinguished from a general 
academic education, from an apprenticeship, and from training in the 
performance of routine mental, manual, or physical processes.
    (2) Whose work requires the consistent exercise of discretion and 
judgment in its performance; and
    (3) Whose work is predominantly intellectual and varied in 
character (as opposed to routine mental, manual, mechanical, or 
physical work) and is of such character that the output produced or the 
result accomplished cannot be standardized in relation to a given 
period of time.
    (C) Terms of employment. An employee with the status of a career 
employee includes any employee who is--
    (1) Eligible to receive vacation, sick leave, or paid holiday 
benefits;
    (2) Eligible to participate in any retirement plan described in 
section 401(a) that is established or maintained by the employer, or 
would be eligible to participate if age and service requirements were 
met;
    (3) Eligible to participate in an arrangement described in section 
403(b), or would be eligible to participate if age and service 
requirements were met;
    (4) Eligible to participate in a plan described under section 
457(a), or would be eligible to participate if age and service 
requirements were met;
    (5) Eligible for reduced tuition (other than qualified tuition 
reduction under section 117(d)(5) provided to a teaching or research 
assistant who is a graduate student) because of the individual's 
employment relationship with the institution;
    (6) Eligible to receive employee benefits described under sections 
79 (life insurance), 127 (qualified educational assistance), 129 
(dependent care assistance programs), or 137 (adoption assistance); or
    (7) Classified by the employer as a career employee.
    (D) Licensure status. An employee is a career employee if the 
employee is required to be licensed under state or local law to work in 
the field in which the employee performs services.
    (e) Effective date. Paragraphs (c) and (d) of this section apply to 
services performed on or after February 25, 2004.

Mark E. Matthews,
Deputy Commissioner for Service and Enforcement.
[FR Doc. 04-3994 Filed 2-24-04; 8:45 am]
BILLING CODE 4830-01-P