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[quote]Second Circuit holds medical residents may qualify for student FICA exception
U.S. v. Memorial Sloan-Kettering Cancer Center et al., (CA 2 3/25/2009) 103 AFTR 2d ¶ 2009–666
The Court of Appeals for the Second Circuit has set aside two district court summary judgment rulings for the government that medical residents did not qualify for the Code Sec. 3121(b)(10) student FICA exception. It sent the cases back to the district courts to determine whether the residents qualified for the exception under the particular facts.
RIA observation: The Second Circuit rejected IRS's view that medical residents per se are ineligible for the student FICA exception. In so doing, it followed recent decisions to that effect by the Sixth (see U.S. v. Detroit Medical Center 103 AFTR 2d 2009–541, discussed in Federal Taxes Weekly Alert 03/05/2009) Seventh (see University of Chicago Hospitals v. U.S. (CA 7 9/23/2008), 102 AFTR 2d ¶2008-5317, discussed in Federal Taxes Weekly Alert 10/02/2008 and Eleventh (see U.S. v. Mount Sinai Medical Center of Florida (CA 11 5/18/2007), 99 AFTR 2d 2007-2800, discussed at Federal Taxes Weekly Alert 05/24/2007) Circuits. [Note: Links to these articles are available when this article is read online on today's Checkpoint Newsstand tab.]
FICA background. Code Sec. 3121(b)(10) exempts from FICA service performed in the employ of a school, college, or university “if such service is performed by a student who is regularly enrolled and regularly attending classes at” such an institution. For purposes of the student employment exemption, Reg. § 31.3121(b)(10)-2 (before it was amended by IRS effective Apr. 1, 2005)—the regs applicable to the case at issue—said that the status of the employee is determined on the basis of his relationship with the organization for which the services are provided. Under that reg, an employee had student status for services performed “as an incident to and for the purpose of pursuing a course of study” at the school, college, or university.
Background on residency programs. After completing medical school and receiving a doctor of medicine (M.D.) degree, prospective physicians commence the graduate phase of their medical education. Generally, graduate medical education consists of a residency or fellowship. Most states, including New York, require physicians to complete a residency program of at least one year before becoming eligible for a medical license. Residency programs typically last between three and five years. These residency programs are accredited by organizations such as the Accreditation Council for Graduate Medical Education (ACGME). The ACGME requires residency programs to be organized educational programs that combine a didactic curriculum with direct exposure to patient care under the supervision of attending physicians. Accordingly, these programs include classroom lectures, daily rounds with an attending physician, Grand Rounds in which experts present research, morbidity and mortality conferences, and reading assignments. Residents are tested and evaluated at times, and those residents who have not mastered necessary skills are given remedial instruction or required to repeat the program. Aspiring doctors receive stipends while they in a residency program.
Facts. The two underlying district court cases were, Albany Medical Center v. U.S. (AMC) and U.S. v. Memorial Sloan-Kettering Cancer Center (Sloan-Kettering). AMC had sought a refund of FICA taxes paid on medical resident stipends between '95 and '99. When IRS failed to act, AMC sued for a refund in district court. Sloan-Kettering received a refund of FICA taxes paid on medical resident stipends between 2001 and 2003. IRS, however, reversed its stance and sued in district court to recover the refund.
In each case, the district court ruled that, as a matter of law, post-graduate medical residency programs are not “schools” and medical residents are not “students.” Both district courts found the statutory and regulatory framework ambiguous as to whether medical residents can apply for the student exception, and both courts consequently relied on the legislative history of the student exception to find that medical residents are categorically ineligible.
Parties' arguments. Before the Second Circuit, AMC and Sloan-Kettering (the hospitals) claimed that the residents participate in patient care only as a way of learning how to care for patients; that any benefit to the hospitals resulting therefrom is entirely incidental; that the hospitals do not meet staffing needs through their residents; and that the hospitals cannot bill for care provided by a resident.
Residents receive stipends from the hospitals. IRS characterized them as compensation for the provision of services. The hospitals stressed that the ACGME requires, as a condition of accreditation, that the hospitals provide residents with the financial support needed to ensure the residents' participation in the residency programs.
Appeals Court reversal. The Second Circuit said it agreed with the Sixth, Seventh, and Eleventh Circuits that the statute is unambiguous and that whether medical residents are “students” and the hospitals “schools” is a question of fact, not a question of law. The statute expressly defines which individuals fall within the scope of the student exception: students who are “enrolled and regularly attending classes.” It also establishes the types of employment that qualify for the student exception: “service performed in the employ of...a school, college, or university.” The Second Circuit said that this language is not ambiguous, and in their effort to invoke the student exception, the hospitals were not asking the Court to adopt an unusual or strained interpretation of the statutory text. Rather, the hospitals merely wanted the opportunity to prove, through the introduction of evidence, that their residents came within the statutory term.
The Second Circuit said that IRS's primary argument was that the fact Congress repealed a separate exemption for services performed by hospital interns in '65 demonstrates that Congress did not believe that medical residents would fall within the scope of the student exception. The Second Circuit said that because the statute is unambiguous, there is no need to resort to legislative history. Accordingly, it sent the cases back to the district courts for factual determinations of whether the residents qualify for the exception.
RIA observation: With this latest Circuit Court defeat, it remains to be seen whether IRS will now throw in the towel on arguing that medical residents are per se ineligible for the student FICA exception.
RIA Research References: For the student FICA exception, see FTC 2d/FIN ¶ H-4607; TaxDesk ¶ 543,009.
Source: Federal Tax Updates on Checkpoint Newsstand tab 3/27/09
[quote/]
[quote]Second Circuit holds medical residents may qualify for student FICA exception
U.S. v. Memorial Sloan-Kettering Cancer Center et al., (CA 2 3/25/2009) 103 AFTR 2d ¶ 2009–666
The Court of Appeals for the Second Circuit has set aside two district court summary judgment rulings for the government that medical residents did not qualify for the Code Sec. 3121(b)(10) student FICA exception. It sent the cases back to the district courts to determine whether the residents qualified for the exception under the particular facts.
RIA observation: The Second Circuit rejected IRS's view that medical residents per se are ineligible for the student FICA exception. In so doing, it followed recent decisions to that effect by the Sixth (see U.S. v. Detroit Medical Center 103 AFTR 2d 2009–541, discussed in Federal Taxes Weekly Alert 03/05/2009) Seventh (see University of Chicago Hospitals v. U.S. (CA 7 9/23/2008), 102 AFTR 2d ¶2008-5317, discussed in Federal Taxes Weekly Alert 10/02/2008 and Eleventh (see U.S. v. Mount Sinai Medical Center of Florida (CA 11 5/18/2007), 99 AFTR 2d 2007-2800, discussed at Federal Taxes Weekly Alert 05/24/2007) Circuits. [Note: Links to these articles are available when this article is read online on today's Checkpoint Newsstand tab.]
FICA background. Code Sec. 3121(b)(10) exempts from FICA service performed in the employ of a school, college, or university “if such service is performed by a student who is regularly enrolled and regularly attending classes at” such an institution. For purposes of the student employment exemption, Reg. § 31.3121(b)(10)-2 (before it was amended by IRS effective Apr. 1, 2005)—the regs applicable to the case at issue—said that the status of the employee is determined on the basis of his relationship with the organization for which the services are provided. Under that reg, an employee had student status for services performed “as an incident to and for the purpose of pursuing a course of study” at the school, college, or university.
Background on residency programs. After completing medical school and receiving a doctor of medicine (M.D.) degree, prospective physicians commence the graduate phase of their medical education. Generally, graduate medical education consists of a residency or fellowship. Most states, including New York, require physicians to complete a residency program of at least one year before becoming eligible for a medical license. Residency programs typically last between three and five years. These residency programs are accredited by organizations such as the Accreditation Council for Graduate Medical Education (ACGME). The ACGME requires residency programs to be organized educational programs that combine a didactic curriculum with direct exposure to patient care under the supervision of attending physicians. Accordingly, these programs include classroom lectures, daily rounds with an attending physician, Grand Rounds in which experts present research, morbidity and mortality conferences, and reading assignments. Residents are tested and evaluated at times, and those residents who have not mastered necessary skills are given remedial instruction or required to repeat the program. Aspiring doctors receive stipends while they in a residency program.
Facts. The two underlying district court cases were, Albany Medical Center v. U.S. (AMC) and U.S. v. Memorial Sloan-Kettering Cancer Center (Sloan-Kettering). AMC had sought a refund of FICA taxes paid on medical resident stipends between '95 and '99. When IRS failed to act, AMC sued for a refund in district court. Sloan-Kettering received a refund of FICA taxes paid on medical resident stipends between 2001 and 2003. IRS, however, reversed its stance and sued in district court to recover the refund.
In each case, the district court ruled that, as a matter of law, post-graduate medical residency programs are not “schools” and medical residents are not “students.” Both district courts found the statutory and regulatory framework ambiguous as to whether medical residents can apply for the student exception, and both courts consequently relied on the legislative history of the student exception to find that medical residents are categorically ineligible.
Parties' arguments. Before the Second Circuit, AMC and Sloan-Kettering (the hospitals) claimed that the residents participate in patient care only as a way of learning how to care for patients; that any benefit to the hospitals resulting therefrom is entirely incidental; that the hospitals do not meet staffing needs through their residents; and that the hospitals cannot bill for care provided by a resident.
Residents receive stipends from the hospitals. IRS characterized them as compensation for the provision of services. The hospitals stressed that the ACGME requires, as a condition of accreditation, that the hospitals provide residents with the financial support needed to ensure the residents' participation in the residency programs.
Appeals Court reversal. The Second Circuit said it agreed with the Sixth, Seventh, and Eleventh Circuits that the statute is unambiguous and that whether medical residents are “students” and the hospitals “schools” is a question of fact, not a question of law. The statute expressly defines which individuals fall within the scope of the student exception: students who are “enrolled and regularly attending classes.” It also establishes the types of employment that qualify for the student exception: “service performed in the employ of...a school, college, or university.” The Second Circuit said that this language is not ambiguous, and in their effort to invoke the student exception, the hospitals were not asking the Court to adopt an unusual or strained interpretation of the statutory text. Rather, the hospitals merely wanted the opportunity to prove, through the introduction of evidence, that their residents came within the statutory term.
The Second Circuit said that IRS's primary argument was that the fact Congress repealed a separate exemption for services performed by hospital interns in '65 demonstrates that Congress did not believe that medical residents would fall within the scope of the student exception. The Second Circuit said that because the statute is unambiguous, there is no need to resort to legislative history. Accordingly, it sent the cases back to the district courts for factual determinations of whether the residents qualify for the exception.
RIA observation: With this latest Circuit Court defeat, it remains to be seen whether IRS will now throw in the towel on arguing that medical residents are per se ineligible for the student FICA exception.
RIA Research References: For the student FICA exception, see FTC 2d/FIN ¶ H-4607; TaxDesk ¶ 543,009.
Source: Federal Tax Updates on Checkpoint Newsstand tab 3/27/09
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