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

...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT