High Court to Hear Tax Case

WASHINGTON -- A nearly 20-year-old legal dispute over whether medical residents are students or workers, for payroll tax purposes, is headed for resolution in the U.S. Supreme Court.

June 2, 2010

WASHINGTON -- A nearly 20-year-old legal dispute over whether medical residents are students or workers, for payroll tax purposes, is headed for resolution in the U.S. Supreme Court.

The country's highest court agreed Tuesday to hear a case in which the Mayo Foundation and the University of Minnesota are challenging the Internal Revenue Service's assertion that doctors in training, and the teaching hospitals that train them, must pay Social Security taxes on the residents' stipends. The case, Mayo Foundation v. United States (09-837), is one in a long line in which the government and medical schools and hospitals have gone toe to toe, with hundreds of millions, if not billions, of dollars potentially at stake.

The medical institutions had for 15 years been getting the better of the fight, winning a series of rulings throughout the late 1990s and most of the 2000s in which four federal appeals courts (the Second, Sixth, Seventh and 11th Circuits) ruled that medical residents fell under the “student exception” in the Federal Insurance Contributions Act, which declares that Social Security and Medicare taxes "do not apply to service performed by students employed by a school, college, or university where the student is pursuing a course of study." The government owed individual medical schools and universities tens of millions in reimbursements, estimated to be over $1 billion in total, and the series of adverse decisions put the government on the hook for those payments.

In late 2004, though, the Treasury Department issued new regulations that declared medical residents to be employees rather than students during their post-medical school period of training, and mandated that they and their institutions pay Social Security tax on the residents' stipends. The rules took effect fully in April 2005.

Last summer, the IRS's regulatory strategy paid off in court, as the U.S. Court of Appeals for the Eighth Circuit, citing and upholding the validity of the new rules, declared that the University of Minnesota and the Mayo Foundation for Medical Education and Research must deduct payroll taxes for their medical residents. The appeals court's decision overturned a lower court's 2007 ruling in the Mayo case, saying that the agency's new rules clashed with the “plain meaning” of the underlying FICA statute as Congress had passed it. Applying the pre-2004 rules, it reached the same conclusion that the multitude of federal appeals courts had previously -- that the institutions’ payments to residents were excluded under the student exception.

In asking the U.S. Supreme Court to hear the case, Mayo and Minnesota (backed by several friend-of-the-court briefs filed by higher education associations and groups of universities) essentially argued that the Eighth Circuit's ruling in the Mayo case created a conflict with the earlier appeals court rulings, since they centered on the same underlying arguments. The Supreme Court is far likelier to step in to hear a case when doing so could resolve a conflict among circuit courts.

In its response discouraging the justices from weighing in, the solicitor general's office asserted that no such conflict existed between the new decision and the older ones, since the Eighth Circuit ruling in Mayo was "the first and only appellate decision to address the validity of the [Treasury Department's] amended regulations’ full-time employee rule."

In agreeing to take the case, the Supreme Court, as is its custom, said nothing about its rationale for doing so, or precisely what issue (or issues) it plans to examine. With the Treasury Department having decided in March to concede that its pre-2005 stance was flawed, and to make reimbursements on claims sought before then, university officials are optimistic that the Supreme Court will decide that the exclusion of all medical residents from the definition of "student" is improper.

"Twenty years of litigation on this issue are enough," lawyers for Mayo and Minnesota wrote in a court filing asking the court to take the case. "This Court should grant review to forestall the needless, repetitive, and wasteful litigation that will inevitably be generated by the government’s unwillingness to accept prior decisions rejecting its untenable interpretation of the Student Exemption."


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