A federal judge in Minneapolis has ordered the Internal Revenue Service to refund the University of Minnesota $1.1-million in Social Security and Medicare taxes that he said the government had improperly levied on medical residents enrolled in the second quarter of 2005.
In an order issued on Monday, Judge Richard H. Kyle of the U.S. District Court for Minnesota ruled that the medical residents qualified for a student exemption from the payroll taxes, which are known as FICA taxes, after the federal law under which they are collected.
In 2005 the Internal Revenue Service changed its regulations to state that medical residents are teaching-hospital employees rather than students, and that they therefore are not exempt. The University of Minnesota challenged that interpretation by suing the government in 2006 for a refund of both the money it had been withholding from residents’ stipends and additional amounts it paid on their behalf. (Employers pay half of Social Security taxes, and employees pay the other half.)
Judge Kyle ruled in the university’s favor this week, ordering the government to refund the taxes, with interest. This is the second time he has sided with parties challenging the IRS amendment (The Chronicle, June 1, 2007).
In August, he issued a similar ruling in a case involving the Mayo Clinic, in Rochester, Minn. The federal government has appealed that decision.
A spokesman for the U.S. Department of Justice said the department is still reviewing this week’s ruling and has not yet determined how it will respond.
If the ruling is upheld, the university will track down the residents from 2005 who are owed money and turn over the portion they paid in taxes, said Mark B. Rotenberg, general counsel of the University of Minnesota system.
“We argued that the IRS did not interpret federal statutes correctly and violated Congress’s intent by shifting its long-standing rules about student exemptions,” Mr. Rotenberg said of the 2005 amendment.
For years, universities and the government have argued over whether medical residents qualify for a student exemption. The battle has centered on the question of how to classify residents—medical-school graduates who are continuing their training under doctors’ supervision. If they are students, taxes don’t have to be withheld from their paychecks, but if they are considered employees, taxes must be withheld. The government has argued that residents’ services economically benefit teaching hospitals so they should be treated as employees for tax purposes.
Ivy Baer, regulatory counsel for the Association of American Medical Colleges, said she was pleased with the ruling, but she added that it was unlikely to set a precedent for courts outside the federal district covering Minnesota.
Most universities have, since 1995, considered the government’s position firm: that medical residents are subject to taxes. Ms. Baer said she had not yet reviewed this week’s ruling but doubted many other jurisdictions would find sympathetic judges.
“I don’t know that any other judges will be so quick to cast aside the IRS rule, which seemed pretty clear,” she said on Wednesday.
Mr. Rotenberg, the university’s chief lawyer, said that if the ruling stands, the university and its medical residents will be able to recoup millions of dollars more in taxes that the institution has set aside for residents since 2005. The lawsuit against the government used the second quarter of 2005 as a test, but it has been setting aside money for FICA taxes ever since then and hopes to get all that money back.
In 1998, the IRS refunded to the University of Minnesota $42-million in FICA taxes covering a seven-year period. About half of that was distributed to residents whose stipends had been taxed, and the rest went to the university. Since then, the IRS has taken a hard line that residents are employees and have to pay Social Security taxes (The Chronicle, Jan. 11, 2002).
