In Mayo Foundation for Medical Education and Research v. United States , the U.S. Supreme Court upheld the validity of a Treasury Regulation that states that the student exception from FICA (Social Security and Medicare) tax does not apply to medical residents because they work at least 40 hours per week. Applying the deferential two-part standard of review from Chevron the Supreme Court concluded that the relevant statutory provision was ambiguous and the regulation was a permissible interpretation of the statute.
For background on the medical resident FICA issue, click here.
As we have previously reported, since the 1990’s many academic medical centers and individual medical residents have filed claims with the IRS seeking refunds of FICA taxes paid on medical resident salaries based on the argument that the residents are students and thus exempt from FICA. In March 2010, the IRS announced that it would concede and pay outstanding claims for periods before April 1, 2005. April 1, 2005 is the date the new FICA regulation precluding student status for full-time workers went into effect.
In June of last year the Supreme Court agreed to hear an appeal of a decision by the Eight CircuitCourt of Appeals in which the Eight Circuit held that the regulation was valid and denied the taxpayers’ refund claims. The Supreme Court affirmed that decision. The Supreme Court stated that the statute does not define the term “student” or otherwise directly address whether medical residents are subject to FICA tax, and concluded that the full-time employee rule is a “reasonable interpretation” of the statute.
While the legal standard applied by the Supreme Court in determining the validity of tax regulations is of great interest to tax practitioners, the significance of this decision for most of us is that the debate about whether medical residents are exempt from FICA tax will finally be put to rest. All timely-filed claims covering periods before the regulation took effect are being paid by the IRS. Medical residents will not be exempt from FICA tax for periods after the regulation took effect – regardless of whether refund claims were filed for post-4/1/2005 periods. Unless there is federal legislation, this multi-decade discussion seems to have come to an end.