Teaching Hospitals: Resolving Claims Seeking A Refund Of FICA Tax On Medical Resident Stipends
Stipends paid to medical residents may be exempt from FICA tax,
so teaching hospitals should review their strategic plans for
getting this refund.
For almost a decade now, most of the teaching hospitals in the
United States have had tax refund claims pending with the Internal
Revenue Service (IRS) that seek many millions of dollars in Federal
Insurance Contributions Act (FICA) tax paid on stipends provided to
their medical residents. The pending claims typically reach back to
tax quarters in 1995 and address both the employer's and the
employees' shares of FICA.
The IRS has refused to take any administrative action on the
claims—refusing to grant, deny or settle them. A few
teaching hospitals brought suit in federal courts, on behalf of
themselves and their residents, to recover tax refunds, while the
government brought suit against a few teaching hospitals that had
managed to obtain refunds. In these suits, the teaching hospitals
won two early battles. In 2005 and 2006, the IRS won three
non-final decisions before federal district court judges, starting
with a victory in Miami. But since then, taxpayers have racked up a
very impressive string of victories, with the result that of the
last 12 substantive decisions issued by the federal courts, nine
have gone in favor of the teaching hospitals.
A key taxpayer victory was handed down in September 2008 by the
U.S. Court of Appeals for the Seventh Circuit in Chicago. In
The University of Chicago Hospitals case, a unanimous
Court of Appeals rejected the IRS's argument that the Student
Exception from FICA tax, upon which the teaching hospitals and
their residents rely, is "categorically off limits" to
medical residents. The Seventh Circuit lined up with the U.S. Court
of Appeals for the 11th Circuit in Atlanta, which in 2007
unanimously issued a similar ruling in United States v.
Mt. Sinai Medical Center of Florida, Inc. After its
appellate victory, Mount Sinai Medical Center defeated the IRS at
trial, with the court finding that Mount Sinai's residents were
students and Mount Sinai a school for purposes of the Student
Exception. More recently, a federal district judge in Boston
followed the Seventh Circuit's decision in The University
of Chicago Hospitals case, reiterating that residents at
teaching hospitals were eligible to assert the Student Exception to
FICA.
Since early in the current decade, teaching hospitals and their
current and former residents have been hoping the IRS would make a
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