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Medical Residents Could Win Big in Supreme Court Tax Case

September 22, 2010

Attorneys are readying their arguments for a Supreme Court case that will determine whether universities have to pay Social Security taxes for students they employ as medical residents at their teaching hospitals.

The Supreme Court agreed to hear the case next term. The case, Mayo Foundation for Medical Education and Research v. United States, involves a rule change by the Treasury Department in 2005 that said medical residents are full-time employees who do not qualify for a student exemption from the taxes. The Treasury removed the exemption five years ago for students who work over 40 hours per week, and said hospitals need to withhold FICA taxes from their paychecks.

The Mayo Clinic and the University of Minnesota have challenged the regulation and requested refunds of the FICA taxes they have paid on behalf of residents since the rule change, arguing that the residents qualified for the student exemption (see Supreme Court to Hear Medical Resident Tax Case).

I talked with John W. Windhorst Jr. of Dorsey & Whitney LLP in Minneapolis, one of the attorneys who filed the Supreme Court petition on behalf of the Mayo Foundation, to find out how the lawyers are preparing for the case, which is scheduled for oral argument on Nov. 8. He noted that a number of institutions and groups have filed amicus briefs in support of their position. They include Loyola University Medical Center, the American Hospital Association, the University of Texas System, and the Association of American Medical Colleges, among others.

The actual argument before the Supreme Court will be made by Ted Olson, a lawyer with Gibson Dunn & Crutcher in Washington, D.C., who as a former Solicitor General is an experienced hand at arguing cases before the justices.

Medical residents and medical schools could win a substantial sum if the High Court decides in their favor.

“If we win the case, then the various institutions that have been filing refund claims for periods since April 1, 2005, will be entitled to receive refunds, and generally half of the refunds will go to the employer institutions and the other half will go to the residents,” said Windhorst.

He doesn’t know how much money that will be, but expect a decision from the Supreme Court by late June, when the term generally ends. If the Mayo Foundation wins the case, the medical residents should not have to wait long to receive their withheld taxes after that point.

“These refund claims have already been filed, and what would happen if we win is that the IRS would begin processing them, and they would be paid out over a period of months, I would guess,” said Windhorst.

Accountants and tax preparers may be able to help with the process, though. “I think probably many of the institutions that have filed clams have consulted with lawyers and accountants in preparing them and they would be involved with processing them, I expect,” said Windhorst.

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