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Medical Residents and the Student FICA Exception
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Much has been in the news recently regarding the exception from paying FICA tax that is available to students and how this might apply in the case of Medical Residents. Two cases have been decided in recent years in favor of Medical Residents. The IRS has responded by issuing new proposed regulations and a new proposed Revenue Ruling on the subject. This article will discuss the two cases and the proposed rules.
Law
FICA taxes must be paid on all wages. As defined in IRC §3101 & §3121, wages are all remuneration for employment. The term “employment” is broadly defined by the statute as any services performed by an employee for an employer. There are specific exceptions to these rules listed in the statute. IRC §3121(b)(10) excepts services performed in the employ of a school, college, or university or affiliated organization described in §509(a)(3), if the services are performed by a student who is enrolled and regularly attending classes at that school, college or university. Under the existing regulations, the term “school, college or university” is to be taken in its commonly used or generally accepted sense. To qualify as a “student performing services” the individual must be pursuing a course of study and his status determined on the basis of the relationship of the employee with the school.
Minnesota v. Apfel
The case that opened a floodgate of FICA refund requests was a decision by the Eighth Circuit Court of Appeals in State of Minnesota v. Apfel. The University of Minnesota had not paid social security tax on stipends paid to medical residents enrolled in the graduate medical education program. The State of Minnesota had an agreement in effect (Section 418 agreement) since 1958 in which it specified group that were to be covered by Social security. The agreement specifically excluded “any service performed by a student” from FICA. The Social Security Administration sought to treat the stipends paid to medical residents as subject to FICA.
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| Recent Developments in Joint Ventures - St. David’s Health Care System
St. David’s Health Care System v. U.S., 5th cir. No 02-50959, 11/7/03 – St. David’s Health Care System brought suit in Federal court arguing that it qualified as tax-exempt under §501(c)(3). The IRS ruled that St. David’s was not entitled to tax exemption because it had formed a partnership with a for-profit company and ceded control of its operations to the for-profit entity. Both sides filed motions for summary judgment at the district court. The district court granted St. David’s motion, ordered the government to refund the taxes as well as pay attorney’s fees and litigation costs. The government filed an appeal. The Fifth Circuit Court found that the district court erred in granting St. David’s motion for summary judgment as the case contained issues of material fact. The Court vacated the district court decision and remanded it for further proceedings.
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| IRS must disclose determinations
Treasury Regulations stating that IRS will not disclose, in any form, its written determinations relating to the denial or revocation of tax-exempt status of organizations violate the plain language of the Internal Revenue Code’s disclosure provisions, the U.S. Court of Appeals for the District of Columbia Circuit rules in Tax Analysts v. IRS. (D.C.Cir. No 02-5278, Dec. 2, 2003) In reversing the U.S. District court ruling that supported the IRS position, the DC Circuit Court said subsection 6104(a)(1))(B) requires that the IRS make “any document” issued by the IRS addressing the exempt status of an organization available for public inspection. The Court said that this section applies whether exemption is granted, denied, or revoked. It is not known if the IRS will appeal this decision. (DTR 12/4/03, EOTR Weekly, vol. 32, no. 10 12/8/03 – Tax Analysts v. IRS D.C. Cir., , 12/2/03)
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