The US Supreme Court recently affirmed a decision of the Court of Appeals for Eighth Circuit upholding the IRS’s position that remuneration paid to medical residents working full-time is subject to FICA tax. The IRC exempts from FICA remuneration paid to students for services performed in the employ of a school, college, or university. At issue in this case was whether the IRS regulations, drawing a bright-line distinction between student and employee for purposes of the student exemption, was a valid interpretation of the IRC. The IRS regulations provide that the student exemption is only available if the service is incidental to the course of study. Furthermore, if an individual is normally scheduled to work at least 40 hours per week, the service is not considered incidental, and the remuneration is considered wages subject to FICA tax. In 2007, rather than rely on the 40 hour per week work schedule standard, a federal trial court held that the IRS would need to determine whether FICA tax was applicable to stipends paid to medical residents on a case-by-case basis. The Eighth Circuit reversed the federal trial court’s decision, concluding that limiting the student exemption to students who were not full-time employees was a valid interpretation of the IRC. The Supreme Court unanimously upheld the Eighth Circuit decision by stating that where a statute is silent or ambiguous, courts should defer to the regulatory agency’s interpretation of the statute, unless the regulation is arbitrary, capricious, and manifestly contrary to the statute. In this case, the Supreme Court held that the IRS position that residents working over 40 hours per week did not qualify for the student exemption was a reasonable interpretation of the statute. Although the specific application of this case is somewhat narrow, the principle that a court should give deference to a regulatory agency’s interpretation of an ambiguous statute has a much broader application. Health care reform, anyone? (Mayo Foundation for Medical Education and Research v. United States, US Sup. Ct. 2011)
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Full-time medical residents subject to FICA
- Hodgson Russ LLP
- Peter K. Bradley, Anita Costello Greer, Michael J. Flanagan, Richard W. Kaiser, Arthur A. Marrapese III and Daniel R. Sharpe
- February 11 2011
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