The Tax Division of the U.S. Justice Department Wednesday sued a Cincinnati teaching hospital to seek repayment of a $5 million tax refund it alleges the hospital erroneously received. The government filed the suit against 409-bed University Hospital in U.S. District Court in Cincinnati, seeking the return of $4.9 million in Federal Insurance Contribution Act refunds for 1999 and 2000. The IRS now contends the refunds were wrongly approved in 2003. The hospital claimed the taxes paid were "scholarship grants," not payment for services, and should not have been deducted under the student-exemption exclusion. In its four-page complaint the government said the payments to residents were not excluded from the residents' gross income and did not fall "within the exception to the definition of employment." University Hospital officials could not be reached for comment at deadline.
The federal government requires employers to pay 7.65% of employee wages or salaries and deduct an equal amount from the employee's paycheck to fund Social Security and Medicare. Hundreds of hospitals sought the FICA refunds after federal courts in Minnesota ordered the government to return money to the Mayo Clinic Foundation and the University of Minnesota starting in 1997. Courts there seemed to rule that some teaching hospitals and academic medical centers could exempt medical residents from paying FICA taxes under a student exemption clause. However, subsequent IRS guidance and a federal court decision last year found no such exemption and the IRS has since sought repayment of those refunds. -- by Mark Taylor