After more than a decade of litigation and deliberation, the Internal Revenue Service relented to the position of academic medical centers that their medical residents qualified for a student exemption to the Social Security and Medicare tax—but only until 2005.
Academic centers score win ...
… but there's a big catch in their FICA victory
The concession could mean tens of millions of dollars for large institutions, but it only applies to taxes paid before revised regulations effective in April 2005 expressly excluded full-time workers from the student exemption even if the work is part of an educational program, which academic medical centers continue to fight.
The IRS last week announced that universities, hospitals and residents who filed claims for refunds within the three-year limitation would be contacted within 90 days with more information about recovering money paid under the Federal Insurance Contributions Act, or FICA.
“The IRS is basically saying, ‘You win. Let’s put this behind us,’ ” said Elizabeth Mills, senior counsel with the law firm Proskauer Rose, who works with teaching hospitals.
The door is closed on filing refund claims. They must have been filed within three years of payment during the qualified period, which ended when the new regulations became effective April 1, 2005. Because the taxes are paid in part with dollars withheld from wages, former residents themselves qualify for refunds if they or the organization that paid their stipend filed a claim on their behalf.
The IRS did not respond to a request for the number of organizations with pending refund claims and the sum that the IRS expects to disburse to satisfy them. “One of the reasons the government hesitated on this is because there is so much money involved,” said Richard Speizman, national partner-in-charge of KPMG’s exempt organizations tax practice, who has followed the issue closely since it started.
The dispute goes back to a 1998 opinion by the 8th U.S. Circuit Court of Appeals. The court sided with the state of Minnesota’s argument that it shouldn’t have to pay FICA taxes for the University of Minnesota’s medical residents, inspiring academic medical centers across the country to ask for their money back.
The IRS generally held the cases in abeyance but in a handful of cases issued refunds, Speizman said. The government later sued those taxpayers to reclaim the refunds, eventually leading to appellate decisions in several circuits against the IRS.
Meanwhile, the Mayo Clinic and the University of Minnesota sued the IRS to challenge the validity of the 2005 regulations. The 8th U.S. Circuit Court of Appeals sided with the IRS in an opinion delivered last June. The plaintiffs have petitioned the U.S. Supreme Court to review the case.
“Our members believe what the IRS needs to do is return to a facts-and-circumstances test to determine this,” said Ivy Baer, director and regulatory counsel for the Association of American Medical Colleges, which filed a brief urging the court to take the case. “The law doesn’t allow a regulation that doesn’t allow any resident to qualify as a student.”
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