Medical Students As Employees: Does Employer Pay FICA?

The University of Chicago Hospitals (“UCH”) brought a refund action (in an appeal entitled “University of Chicago v. USA”, Case No. 07-3686, decided October 29, 2008 by the 7th Circuit Court of Appeals) against the United States to recover taxes it paid in 1995 and 1996 under the Federal Insurance Contributions Act (“FICA”), §§ 3101-3128, on behalf of its medical residents. UCH maintained it was entitled to a refund because its residents qualified for the “student exception” from FICA tax under the Internal Revenue Code (“IRC”), 26 U.S.C. § 3121(b)(10), and the controlling Treasury Regulation in place during the relevant time period, § 31.3121(b)(10)-2.

After the IRS took no action in response to the refund claim, UCH filed this refund action, seeking $5,572,705 it had paid in FICA contributions for its residents in those years.

The district court agreed initially to entertain the government’s motion on the question of whether medical residents are categorically not “students” under § 3121(b)(10) and therefore not exempt from FICA tax as a matter of law. If the answer to this question was “no”-that is, if residents may qualify for the student exception-then the case would proceed on the question of whether UCH’s residents were students within the meaning of § 3121(b)(10).

The district court rejected the government’s argument that residents were per se ineligible for the student exception.

The U.S. Court of Appeals for the Seventh Circuit granted the government’s petition and affirmed the U.S. District Court holding that the student exception under § 3121(b)(10) is not per se inapplicable to medical residents as a matter of law; rather, a case-by- case analysis is required to determine whether medical residents qualify for the statutory exemption from FICA taxation. The implementing Treasury Regulation applicable at the time set forth a method for determining eligibility for the student exception- one that focused on the character of the employing organization as a school, college, or university and the relationship of the employee-student to that organization. This necessarily implies a case-specific analysis, not a categorical ineligibility for certain classes of employee-students.

Have a FICA tax problem? Speak with a Los Angeles tax attorney about it and call Mitchell A. Port at (310) 559-5259.