Still in the midst of a lengthy battle with the Internal Revenue Service over whether medical school residents qualify for a student exemption from payroll taxes, universities and medical students across the country earned a victory last week that could be worth billions of dollars. On March 2, the IRS announced it will honor medical resident Federal Insurance Contributions Act (FICA) tax refund claims for periods predating April 1, 2005, when a revision of the tax code effectively barred residents from a longstanding student employee exemption. Since it was issued, the regulation has been opposed strongly by medical schools and hospitals nationwide. The University of Minnesota, a co-plaintiff with the Mayo Clinic, is awaiting word on whether a case that challenges the validity of the IRSâÄôs 2005 regulation will be heard by the Supreme Court. Hospitals and medical schools have long argued that the role of residency is primarily educational and that their residents are students eligible for payroll tax exemption. A group of recent federal cases held that residents are not categorically precluded from being classified as students but didnâÄôt address whether the new FICA regulations regarding medical school residents are consistent with tax law. University General Counsel Mark Rotenberg said the IRSâÄôs decision to grant pre-2005 refunds indicates that they are âÄú[cutting] their lossesâÄù and focusing only on defending the merits of the new student employee exemption regulations. The University sued the IRS shortly after the 2005 regulations took effect, and Judge Richard Kyle of the U.S. District Court for Minnesota ruled in April 2008 that University medical students did in fact qualify for the exemption. Additionally, Kyle ruled that the IRSâÄôs regulation of the FICA exception was invalid, and he ordered the IRS to refund the Medical School and its residents $1.1 million in Medicare and Social Security taxes. On appeal, however, the 8th Circuit Court reversed the decision. The odds of any one case coming before the Supreme Court are never good, but Rotenberg said he believes the UniversityâÄôs is highly worthy. Minnesota has long been at the forefront of the argument that medical school graduates continuing their training under doctor supervision fall into the category of student employees exempt from FICA taxes. The state was the plaintiff in one of the first cases on the issue âÄî a 1998 appellate ruling that upheld a district court finding that residents in the case were students. A typical week for a resident includes about four hours of classroom lecture and more than 40 hours of field work. In its 2005 decision, the IRS said an employee who âÄúregularly performs services 40 hours or more per week is a career employeeâÄù and ineligible for the FICA exemption. Ivy Baer, director and regulatory counsel at the American Association of Medical Colleges, doesnâÄôt expect all residents to be ruled exempt from FICA taxes, but she said the IRSâÄôs blanket treatment of all residents as career employees fails to address the nuances of individual schools. âÄúWhether residents pay or not and whether their institutions pay or not should be decided based on the particular circumstances of that institution and how the residency is set up,âÄù Baer said. The IRS will begin contacting hospitals, universities and medical residents who filed refund claims within 90 days to provide them with further instructions for recovering pre-2005 FICA taxes.