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.

We have been closely following the medical resident FICA refund issue. As we noted in our blog entry in March on the topic, the IRS conceded that refund claims for FICA taxes for medical residents for the periods before April 1, 2005 will be paid. The IRS has now announced this month that it has begun sending letters to individual medical residents who filed individual claims for FICA refunds. These letters ask the individuals to submit copies of their claims.

Many health care and medical education institutions have claims pending with the IRS for refunds of the FICA (Social Security and Medicare) tax paid on wages for employed medical residents. The issue for these claims is whether the residents are “students,” and their wages accordingly exempt from FICA tax, for purposes of the student FICA exception in the Internal Revenue Code.
Last summer, the Eighth Circuit Court of Appeals held that this regulation was valid in the Mayo Foundation for Medical Research and Education and the University of Minnesota cases. These institutions petitioned the Supreme Court for certiorari. Yesterday, the United States Supreme Court granted the certiorari petition and will hear the appeal.

The IRS has announced that it plans to honor certain medical resident FICA refund claims for periods before April 1, 2005, when new IRS regulations went into effect. The IRS’s brief announcement does not indicate the terms on which claims will be paid. Still, the IRS notes that verification of the claim amount will be required and interest will be paid.

Parsonage is a seemingly innocuous five line tax benefit in the Code.  This “innocent” provision of the Code, Section 107, appears to have befuddled many ministers and their professional advisors, however.

About 90 years ago, Congress promulgated an exclusion from income for the rental value of the housing provided to a “minister of the gospel,” which includes priests, rabbis, imams and any other duly ordained, commissioned or licensed member of the clergy.  Alternatively, the minister can exclude the rental allowance paid as part of compensation, to the extent actually used as rent or other costs of home ownership.  Since 2002, the allowance is capped at fair rental value, including furnishings and appurtenances (such as a garage), plus the cost of utilities.

While there are IRS publications that explain the tax nuances of parsonage (e.g., Publication 517 and The Tax Guide for Churches and Religious Organizations), the unusual tax treatment of ministers can still be very confusing.