ataxingmatter: IRS wins case on medical resident FICA taxes

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IRS wins case on medical resident FICA taxes

[edited to add Eighth Circuit website link to case]

This issue has garnered a good bit of attention in universities with med schools, and so it is worth noting the outcome in the Eighth Circuit today. The IRS regulations issued in 1994 (T.D. 9167) say stipends paid to medical residents that work more than 40 hours a week are subject to employment taxes under the Federal Insurance Contributions Act (FICA). The University of Minnesotta and the Mayo Foundation argued that those regulations were invalid, because of the student exception to FICA.

The statute taxes wages, which are broadly defined as "all remuneration for employment." "Employment" is defined as "any service, of whatever nature, performed ....by an employee". There are a number of statutory exceptions, including one for students. That exception is for "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." See section 3121(a), (b).

The issue, of course, is whether at medical resident qualifies as a student under this definition. My daughter-in-law just "graduated" from medical school and has just started her residency in Oregon. She is delighted that she will now be paid a salary and have some income while she continues learning. There appears to be a clear status difference between medical students and medical residents, reflected in the salary and in the role of the residents in the teaching hospital. So the idea of FICA taxes seems to make sense in that context. I can't fault the IRS for its conclusion as expressed in the 2004 regs--that "[t]he services of a full-time employee are not incident to and for the purpose of pursuing a course of study" and that someone "whose normal work schedule is 40 hours or more per week is considered a full-time employee."

The Eighth Circuit agrees. Applying the Supreme Court's Chevron doctrine of deference to reasonable agency interpretations of an ambiguous statute, the court upheld the validity of the regulations as interpreting ambiguous terms in the student exception to FICA. Though there may be a common understanding of "student" in other contexts, the court notes, Treasury Regulations have clearly been upheld that construe a large variety of "words in tax statutes that have a common or plain meaning in other contexts." The court provides legislative history and court cases relevant to the issue, which the Service also relied on in the notice of proposed rulemaking to conclude that the exception was meant for those who would otherwise have only nominal benefits. Ultimately, the court concludes that applying the student exception only to those who are not full time employees is a reasonable interpretation of the statute.

The case is Mayo Foundation for Medical Education and Resarch v. U.S., No. 073242 (June 12, 2009) (available here on BNA and here on Eighth Circuit website).

June 12, 2009 | Permalink