Big Legal Victory for Teaching Hospitals

Federal appeals panel vacates lower court's ruling that medical residents (and their institutions) must pay Social Security taxes.
May 22, 2007

Universities and hospitals that train doctors won a potentially huge victory Friday in a long-running, many-million-dollar legal fight with the Internal Revenue Service.

The ruling by the U.S. Court of Appeals for the 11th Circuit vacated a lower federal court's 2005 decision that medical residents are in all cases required to pay Social Security taxes on their wages. The lower court's ruling -- which clashed with a 1998 decision by another federal appeals court that had been seen as the prevailing legal precedent -- had been embraced by the Internal Revenue Service in its push to force teaching hospitals to pay tens (if not hundreds) of millions of dollars in back taxes.

The January 2005 opinion by U.S. Judge Alan S. Gold had concluded that given the legislative history of the Social Security Act, medical residents at Mount Sinai Medical Center of Florida did not qualify under the law's "student exemption," which precludes students from having to pay Social Security taxes. The judge ruled that Mount Sinai had received an "erroneous refund" of $2.45 million.

But in its decision Friday, a unanimous three-judge panel of the 11th Circuit soundly rejected Gold's reasoning and conclusions.

The lower court judge should not have even turned to the legislative history of the Social Security Act because the language of the law is "unambiguous," the 11th Circuit panel ruled. "If Congress had wanted to make medical residents ineligible for the student exemption, it could have easily drafted a specific exclusion, [as it did for] medical and dental interns and residents employed by the United States."

"We reject the government's assertion that courts should defer to a 'bright line' rule that medical residents can never be exempted from [Federal Insurance Contributions Act] taxation as students," the appeals panel added. "Instead, a case-by-case analysis is necessary to determine whether a medical resident enrolled in a [graduate medical education] program qualifies" for a student exemption.

The appeals court directed the lower court to rule specifically on whether "Mount Sinai qualifies as a 'school, college, or university' and whether the Mount Sinai residents qualify as 'students.' " (Florida's Mount Sinai does not award medical degrees, unlike the similarly named institution in New York with which it is not affiliated.)

The 11th Circuit's analysis is consistent with the major appeals court ruling on this issue to date, which came in 1998 in a case involving the University of Minnesota. Based on the guidelines laid out in that ruling, most medical residents would be deemed to qualify for the student exemption, saving the doctors-in-training and their institutions from sharing the 15 percent tax on the residents' wages.

But the Internal Revenue Service -- which could be forced to either repay (in the case of medical schools and teaching hospitals that already paid such taxes) or forgo (in cases in which the revenue agency has sought to force medical institutions to pay such taxes) -- has sought an alternative ruling to the Minnesota case, and since 2005 it has used the Florida court's ruling in the Mount Sinai case to argue in several proceedings against having to refund Social Security tax payments to medical schools or teaching hospitals, said Bertrand J. Harding, a tax lawyer in Washington.

"By undermining the 'legislative history' argument, this decision takes away almost the only hook [the IRS] had to hang its hat on," said Harding. Exactly how much is at stake in these various cases is unclear, but given the stakes in the Mount Sinai case, tens if not hundreds of millions of dollars are potentially in play.

A spokesman for the Internal Revenue Service said the agency typically does not comment on litigation.


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