The Internal Revenue Service’s efforts to collect millions of dollars of back Social Security and Medicare taxes on the money paid to medical residents suffered another blow on Wednesday, when a federal appeals court ruled that two teaching hospitals should have another chance to prove that their residents are exempt.
The ruling, by a three-judge panel of the U.S. Court of Appeals for the Second Circuit, involved a case filed jointly by the Albany Medical Center and the Memorial Sloan-Kettering Cancer Center.
The U.S. Justice Department has argued that medical residents — recent medical-school graduates who are training under more experienced doctors’ supervision — are primarily employees, not students. Therefore, it argues, they are ineligible for a student exemption from paying Social Security and Medicare taxes. (Employees pay half of those two payroll taxes, known as FICA for the federal law that authorizes their collection, and employers pay half.)
Teaching hospitals and academic medical centers have countered that the primary purpose of residency programs is to educate, not provide patient care, so they and their doctors-in-training should not be subject to the payroll taxes.
On Wednesday the appeals court agreed that the issue wasn’t as clear-cut as the IRS was trying to make it and sent the case back to the two teaching hospitals’ respective district courts.
“We hold that both district courts erred in ruling as a matter of law that medical residents are categorically ineligible for the FICA tax exemption for students,” the ruling stated.
The ruling is the latest of several that have rejected the government’s argument that medical residents are automatically ineligible for student exemptions. In February a three-judge panel of the U.S. Court of Appeals for the Sixth Circuit agreed to give the Detroit Medical Center another day in court to argue why its residents should not have to pay the taxes. In 2005 the IRS amended its regulations to stipulate that medical residents are employees, not students, and that they therefore have to pay FICA taxes. But four times since then, court rulings have questioned that interpretation. —Katherine Mangan
