Judge tells IRS it must refund $1 million it collected from U

  • Article by: DAN BROWNING , Star Tribune
  • Updated: April 1, 2008 - 9:04 PM

He ruled that the U of M medical school overpaid on taxes related to stipends paid to medical students.

Sometimes, even the tax man must pay.

A federal judge in Minneapolis ruled Tuesday that the government improperly levied more than $1 million in taxes on the University of Minnesota for medical residents enrolled in the second quarter of 2005.

U.S. District Judge Richard Kyle ordered the government to repay the university $1,094,803.92, plus interest, related to its overpayments of "FICA taxes."

FICA stands for Federal Insurance Contributions Act. Employers pay an excise tax on wages and employees pay an income tax. The money goes to the Social Security system.

But FICA excludes services performed for a school, college or university if it's performed by a student attending classes. The 8th U.S. Circuit Court of Appeals ruled in 1998 that stipends paid to medical students were not subject to FICA. And Kyle ruled in 2003 that stipends paid by the Mayo Foundation to its medical residents were barred from FICA taxation.

The Internal Revenue Service changed its regulations in 2004 to disqualify full-time medical residents from the exclusion. But in August, Kyle ruled the amended regulations invalid in a case involving the Mayo Foundation. The government's appeal of that ruling is pending.

Meantime, in 2006, the U of M Regents sued the government for a refund. Kyle granted their motion for summary judgment Tuesday. He said in a 17-page order that medical students exhibit the traits required by the "student exception" to FICA taxes.

Kyle rejected the government's arguments that the residents should be classified as employees because the hospitals benefit economically from their services and the university does not.

"This argument ignores the crucial fact that the University is a nonprofit organization; its purpose and function is medical education," Kyle said.

Assistant U.S. Attorney Michael Pahl, who works in the tax division at the Department of Justice in Washington, D.C., represented the government. He could not be reached Tuesday for comment.

Dan Browning • 612-673-4493

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