U.S. Court Says Mayo Clinic and U. of Minnesota Must Remit Payroll Taxes After All

June 12, 2009

A federal appeals court today reversed a lower court’s ruling and decided that the Mayo Clinic, in Rochester, Minn., and the University of Minnesota were not entitled to refunds of Social Security and Medicare taxes paid on behalf of medical residents who were studying and working at those institutions.

In 2008 a federal district-court judge in Minnesota ruled that the medical residents at the university qualified for a student exemption from the payroll taxes, which are known as FICA taxes, after the federal law under which they are collected. The district judge held that rules issued in 2005 by the U.S. Treasury Department, which excluded full-time medical residents from the student exception, were invalid because those rules were contrary to the meaning of the original law creating the Social Security system.

But a unanimous three-judge panel of the U.S. Court of Appeals for the Eighth Circuit, reviewing separate judgments for both the university and the Mayo Clinic, ruled today that the district court should have paid deference to the Treasury Department’s rules because the student exception was meant to give tax relief to students who worked only part time while attending classes, the appeals court said.

The three-judge panel noted, however, that its decision conflicts with rulings issued by other U.S. Courts of Appeal, in the Second, Sixth, Seventh and 11th Circuits. Such conflicts are among the primary factors that influence the U.S. Supreme Court to accept an appeal. William Donohue, the university’s deputy general counsel, told Dow Jones Newswire that the university was considering an appeal to the full Eighth Circuit or to the U.S. Supreme Court. —Eric Kelderman