Supreme Court Agrees to Review Decision That Upheld Medical Resident FICA Rules


The U.S. Supreme Court on June 1 agreed to review a federal appeals court decision that upheld Internal Revenue Service regulations that state that the stipends paid to medical residents who work more than 40 hours per week are subject to employment taxes (Mayo Foundation for Medical Education and Research v. United States, U.S., No. 09-837, review granted 6/1/10).

The high court granted a petition filed in January that sought review of a June 2009 ruling by the U.S. Court of Appeals for the Eighth Circuit that found the regulations—T.D. 9167, issued by the IRS in 2004 and effective April 1, 2005—were a reasonable interpretation of the student exception under the Federal Insurance Contributions.

The Eighth Circuit said that, although the act excludes from its coverage “wages” paid to a student who is enrolled and regularly attending classes, the regulations reasonably clarified that “wages” paid to a full-time employee by a college or university are not excluded. The clarification also is consistent with Congress's intent that the exclusion only applies to nominal amounts of compensation where the buildup of Social Security benefits would be inconsequential, the court added.

The appeals court reviewed the student FICA exception contained in Section 3121(b)(10) and said that, notwithstanding a number of federal trial courts that have found the statutory exception unambiguous, the code provision is ambiguous and subject to reasonable agency interpretation. The question then became whether the IRS regulatory interpretation of ambiguous terms was reasonable and consistent with the act, the court said.

In making that determination, the court looked at the IRS's prior student exception regulations, which included limitations that tied the availability of the exception to a finding that the employment was only “incidental” to a course of study. The very fact that the prior regulations construed the statutory terms to impose such a limitation suggested that they were ambiguous, the appeals court noted.

Having determined that there was room for IRS interpretation, the court asked whether that interpretation was reasonable and consistent with the statute. In concluding that it was, the court said the amended regulation, which applies only to wages paid after March 31, 2005, “harmonizes” with the plain language of the statute and is consistent with the student exception's origin and purpose.

The appeals court also rejected the idea that the regulations reflected an impermissible and unsupported change from prior agency approaches, saying there was no evidence that the IRS ever considered that medical residents were covered by the FICA student exception.

The Eighth Circuit's decision reversed a pair of rulings by a federal trial court in Minnesota—involving medical residents of the Mayo Foundation for Medical Education and Research and the University of Minnesota—that ruled that student exception was not ambiguous and that the regulations were not consistent with the FICA's student exception.

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