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Supreme Court Hears Medical Resident Tax Case

November 9, 2010

The Supreme Court heard a case challenging an IRS rule requiring medical residents to pay Social Security taxes.

The case, Mayo Foundation for Medical Education and Research v. the United States, sought clarity on the applicability of the traditional FICA student exemption to medical residents. In 2005, the IRS issued a rule that subjected medical residents to pay the employee share of Social Security taxes.

Justice Ruth Bader Ginsburg questioned former Solicitor General Ted Olson, who represented the Mayo Foundation during oral arguments Monday, and appeared to side with the government.

“But it might be relevant, because it would be unseemly, perhaps, to have residents who are not working at, quote, "schools," subject to the FICA tax, and other residents whose training is approximately the same escape the tax,” she said.

“Well, that was a judgment that Congress made,” Olson responded. “Congress made the exemption with respect to students and it tied specifically in to someone who is enrolled and regularly attending classes.”

Justice Sonia Sotomayor also seemed skeptical in her questioning. “How I look at this case is: How do you draw the line between a student who is working and a worker who is studying?” she said “So the issue for me is: Is the Treasury Department's identification of how to draw that line unreasonable? Do we owe them deference?”

Sotomayor wondered why paying medical residents $50,000 or $60,000 did not make them employees.

Chief Justice John Roberts asked why the IRS should not be considered the arbiter in whether the residents should be considered employees or not.

“This basically [is] a very familiar situation of an apprentice who is both an employee and both a student, and to try to draw the line in some categorical way doesn't make sense,” he said. “The only way you can draw the line is to have somebody say: This is going to be the line. And if anybody is going to say it, it ought to be the IRS.”

There was one humorous, but awkward moment when the justices’ own exemption from Social Security taxes came up during the discussion, according to the transcript.

Mr. Olson: Oh, by the way -

Justice Sotomayor: It's -- it's, in my mind, difficult to separate out what makes a person or stops a person from learning on a job.

Mr. Olson: Well, the fact is -

Justice Sotomayor: At any job, actually.

Mr. Olson: Well, the Justices of this Court are exempt from Social Security taxes --

Chief Justice Roberts: You are not challenging that, are you, Mr. Olson?


Mr. Olson: No, you're okay.

Justice Sotomayor: I opted in, Mr. Olson, for the very reason the residents might want to.

In the meantime, the IRS has established procedures for refunding FICA taxes withheld from the residents' prior to the 2005 rule change (see IRS Clarifies Handling of Medical Resident FICA Claims).

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