University sues U.S. for 2005 tax refund

The University seeks refunds for 2005 social security taxes paid by medical residents.

Is a medical resident who works 40 hours or more per week a student or not?

That’s the question being asked right now in Minneapolis’ U.S. District Court in a civil lawsuit filed by the University in December 2006. The case is expected to be heard by Judge Richard Kyle on Feb. 21.

University lawyers filed the lawsuit seeking nearly $1.1 million plus interest in refunds from the government for medical residents who paid Federal Insurance Contributions Act, or social security, taxes in the second quarter of 2005.

Attorney Michael Pahl, on behalf of the United States, said in a statement to the court that medical residents whose normal work week is 40 hours or more don’t qualify for the student exception due to the Secretary of the Treasury’s amendment in 2004 concerning residents.

The University contends that the regulation was changed specifically to target medical residents, and that the regulation is arbitrary and conflicts with the statute.

University General Counsel Mark Rotenberg said the case isn’t just about getting a refund for students who were residents in 2005.

“The case isn’t about the (second) quarter,” he said. “It’s about the principle. Do we have to pay the tax or don’t we?”

U.S. Department of Justice spokesman Charles Miller said the government is firm in its stance on the case.

“The government’s position in this matter is we strongly contend that medical residents are subject to the FICA tax and do not qualify for the exception in the law for students,” he said in an e-mail.

Rotenberg said the Internal Revenue Service, a bureau within the Treasury Department, amended the regulation after losing a previous lawsuit to the University in 1998.

“As a result of winning our case, the IRS amended its internal rules to clarify that their position was correct, and that a medical student was by definition not a student,” he said.

He added that the University has been one of the leaders in challenging the government’s position on this issue, and over the years has been able to recover millions of dollars for medical students and the University.

Deputy General Counsel Bill Donahue said 809 students were medical residents in 2005 and would be affected by this lawsuit, and that stipends for medical students typically range from $40,000 to $50,000.

Jared Austin, now a chief resident in pediatrics at the University, was a medical resident in 2005, and says that he considers himself “certainly a student.”

Austin said when he was a resident he was making about $42,000 per year with yearly increases of about $1,500, but was also working 70 to 80 hours per week.

“If you were to have a job in the private sector, to be making $7 to $8 per hour is a pretty low amount,” he said.

Austin said he doesn’t think medical residents should have to pay social security taxes because they are students. He also said a refund would “certainly be nice.”

Rotenberg is confident the University will win its case, but knows it’s not that cut-and-dry.

“We believe the court will rule in our favor,” he said. “But it’s not as simple as ‘We won the first time, so we’ll win the second time.’ “

Rotenberg said the judge will then rule on the case within 30 days. Regardless of the outcome, the case will likely be appealed by the loser because of the amount of money at stake.