The University stands to save more than $58 million after the Eighth U.S. Circuit Court of Appeals ruled in its favor Tuesday.
The decision absolves the University of responsibility to make Social Security payments on behalf of medical residents.
Upholding a lower court’s 1997 ruling, the appellate court’s three-judge panel said the Social Security Administration owes the University more than $40 million in refunds stemming from taxes paid since 1990.
The panel also ruled that the University is not liable for $18 million in Social Security taxes paid to the agency for the years 1985-90.
The $58 million swing represents the largest litigation success in the University’s history.
The University maintained the legal dilemma arose from conflicting definitions of students in postgraduate medical programs. As of 1973, the term “intern” is only used to describe students in their first year of medical school at the University. In following years, students are considered “residents,” which the University said exempts them from paying Social Security taxes.
University head attorney Mark Rotenberg said the ruling is a victory for medical students and the entire University community.
“In this case we were confident the government got it wrong,” Rotenberg said. “We always thought that our position was the legally viable one.”
Tom Tinkham, an attorney from the law firm of Dorsey & Whitney, represented the University in the case against the Social Security Administration.
About half of the $40 million recovered from taxes paid since 1990 will be returned to medical students for which the University paid Social Security taxes. The University will recover the other half of the $40 million. The University had matched Social Security taxes paid by student-employees dollar-for-dollar.
Rotenberg said he estimated several thousands of students will claim refunds.
In order to receive payments from the government, students must call the University’s payroll office and provide their name and address. The University is then authorized to file a claim for compensation from the government on the students’ behalf.
The case stems from a 1987 lawsuit filed by medical student James Ross who claimed the University did not act in accordance with the law when the medical school dismissed him. He claims he was under contract and therefore entitled to employee benefits.
Ross contended that the University is not exempt from paying Social Security taxes for medical residents because of a 1965 tax amendment.
After Ross filed the lawsuit, federal authorities proceeded to investigate the University’s tax practices dating back 23 years.
But in May 1997, U.S. District Court Judge Ann Montgomery ruled medical residents should be considered students, thereby exempting the University from making Social Security payments on their behalf.
Annual stipends medical residents earn do not qualify for Social Security taxation under two conditions: residents’ earnings are excluded from taxation by a state-federal agreement, and the appellate court ruling defining residents as students qualifies them for a recently imposed student exemption.
Rotenberg said it is quite possible the case will have implications for colleges and universities nationwide. But he also said an appeal to the Supreme Court is an option for the Social Security Administration.