US Med Students Await Tax Verdict

by Glen Shapiro, LawAndTax-News.com, New York

07 June 2010

The United States Supreme Court has agreed to hear an important case on whether medical students working more than a certain number of hours per week should pay social security taxes.

Prior to 2005, medical students in residence at hospitals and clinics were exempt from paying social security taxes on their stipends because they were not considered 'in employment' but still in education. However, the US Treasury changed the rules in 2005 in response to a number of court defeats for the Internal Revenue Service (IRS), which argues that students in residency are providing services as employees more than they are there to learn.

The Treasury ruling stipulates that doctors in training cannot be considered 'students' if they are putting in more than 40 hours per week during their residencies. But most medical students learning on the job put in vastly more hours than this and the medical profession argues that it is unfair to saddle colleges and other educational and medical institutions with the added burden of social security tax, charged at 6.2% on both the employee and the employer, on top of training costs.

The case in question has been brought to the Supreme Court by the University of Minnesota and the Mayo Clinic in Rochester, Minnesota, in an attempt to overturn a ruling by the 8th Circuit Court of Appeals in St Louis, which sided with the IRS on the basis of the 2005 Treasury ruling. At stake is about USD700m per year in tax revenue, plus a USD2.1bn refund claim.

The ruling would affect about 8,000 residency programs, along with some 100,000 medical residents. The Supreme Court's verdict is also needed to ensure consistent interpretation of the rules as they stand; the 8th Appeals Circuit, which covers Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, has contradicted rulings in favor of medical colleges and students by other circuit courts, meaning that social security taxes will be enforced in some areas of the US but not others.

Highlighting the gravity of the case, University of Minnesota General Counsel Mark Rotenberg noted that the Supreme Court grants review in only 1% of the cases in which a petition is filed.

"This is only the second case involving the university ever heard by the Supreme Court since the university's founding in 1851," he observed.

"We are very pleased that the Supreme Court Justices will now give this case very careful consideration. The government itself has acknowledged that the question in this case involves billions of dollars in pending tax refund claims, and hundreds of millions of dollars per year in FICA (social security) taxes that must come from increasingly scarce medical education funds. In agreeing to hear this case, the Supreme Court has acknowledged the exceptional importance of this question for medical residency programs and medical residents across the United States," Rotenberg added.

The Supreme Court is expected to hear oral arguements in the case towards the end of the year.

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