For purposes of the IRS, medical residents are not students and therefore are not exempt from paying FICA payroll taxes for Social Security and Medicare, according to the U.S. Supreme Court in a case involving doctors in training at the Mayo Clinic and the University of Minnesota Medical Center.
In an 8-0 ruling, the high court ruled Tuesday that residents are not entitled to the student exemption from paying FICA taxes because they work more than 40 hours a week.
Chief Justice John Roberts wrote that the IRS ruling on the matter "is a reasonable construction" of what Congress intended for student tax exemptions.
Attorneys for Mayo and the university expressed disappointment in the court's decision, which evolved from a lawsuit filed after the IRS changed its position on payroll taxes in late 2004.
"As the court itself acknowledged, medical residents are engaged in a formal and structured educational program," said Theodore Olson, attorney for the two hospitals who argued the case before the high court. "The Treasury Department's regulation overlooks the important educational pursuits in which residents are engaged."
Mark Rotenberg, the university's general counsel, called the IRS policy a "rigid rule."
"The university is disappointed in the outcome of this case," Rotenberg said.
The two institutions and their residents have been paying their FICA taxes since the new rule was implemented.
Had Mayo and the university prevailed, the hospitals and their residents would have received a refund, in the university's case an estimated $24 million. Mayo said taxes for its residents are about $2.7 million a year.
The university and Mayo Clinic filed separate lawsuits challenging the IRS rule in 2007 and received favorable rulings in U.S. District Court in 2008. The government appealed the rulings to the Eighth U.S. Circuit Court of Appeals, where they were reversed. The Supreme Court decision upholds the Appeals Court ruling.
This was the second visit to court for the university on the FICA-student topic. It won a favorable ruling in 1998 and received a $40 million refund for the hospital and its residents.
David Phelps • 612-673-7269