U, Mayo Clinic sue IRS to recover taxes

Alex Amend

The University is again in litigation with the Internal Revenue Service over University medical residents’ Social Security taxes.

Both the University and the Mayo Clinic have filed suits seeking restitution for a combined $2.8 million in Social Security money paid by about 2,000 medical residents since the IRS’ implementation of a new Federal Insurance Contributions Act regulation in April 2005.

The claims seek amounts paid by residents, the University and Mayo immediately after the regulation in April. The University is seeking $1.1 million and the Mayo Clinic about $1.7 million.

The new regulation alters the former employee-employer relationship basis and deems any resident with a 40-hour work week a full-time employee, regardless of student status, and therefore eligible for Social Security payments.

The former FICA regulation carved out a harbor for residents whose services were, according to FICA language, “incident to and for the purposes of pursuing a course of study.” In other words, residents with a student status of at least half-time, as defined by the Department of Education, were exempt from being taxed.

A common conflict

The fight over residency programs and the enforcement of Social Security payments are by no means new, nor are they confined to the University.

In 1998, the University successfully recovered around $40 million in Social Security taxes paid by the University and students in the residency program, according to a November 1998 news release.

In 2003, a district court ruled in favor of the Mayo Clinic and medical residents further reinforcing the original FICA exemption of both the institution’s residency program and its students.

Around the country, multiple universities and residency programs are under pending suits similar to the University’s. Most notably, the Mount Sinai Medical Center in Miami Beach lost its case in 2005 as the district court ruled under the oft-employed reasoning that courts should err on the side of inclusion when dealing with Social Security coverage, even in lieu of the Mayo ruling.

University General Counsel Mark Rotenberg views the new regulation as an attack on the former rulings in both the Mayo case and the University’s in 1998.

Rotenberg said he believes the IRS is attempting to “reverse the victory” awarded to the medical residency programs and the institutions that provide them. He said the purpose and value of the tax exemption is two-fold: the first being the fact that medical training is already far and away very expensive.

Secondly, Rotenberg said the ability to recruit promising medical students would be hindered if the University were to offer less competitive stipends for its program, as the enforcement of such a regulation would surely force into being.

Rotenberg went on to say that if the IRS doesn’t like the rulings already settled in court, they should try Congress.

The suits were filed by John W. Windhorst Jr. and Thomas Tinkham, attorneys with Minneapolis-based Dorsey & Whitney.