Supreme Court hears oral arguments in medical residency tax case

Supreme Court hears oral arguments in medical residency tax case
Associate Justice Elena Kagan, the newest member of the Court, and the Supreme Court Justices of the United States sit for a formal group photo in the East Conference Room of the Supreme Court in Washington on October 8, 2010. UPI/Roger L. Wollenberg | License Photo

The U.S. Supreme Court journeyed from tax code to dictionary to define the terms "student" and "employee" for medical-resident tax exemption purposes.

Justice Elena Kagan, as solicitor general, argued in a brief in the case of Mayo Foundation Medical Education and Research vs. United States of America medical residents do not qualify as students and, therefore, are not exempt from Social Security payroll taxes.


In that vein, the other justices, during oral arguments last week, explored various approaches to determine whether residents are predominantly students and therefore exempt from paying into Social Security or employees and liable.

Justice Stephen Breyer, to Justice Antonin Scalia's amusement, put aside the statute and repeatedly consulted a dictionary as he sought to determine how much work is "incident" to the residents' learning or vice versa. Justice Sonia Sotomayor focused on the amount of supervision residents receive. And Justice Ruth Bader Ginsburg equated medical residency with typical work-study programs.

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The lawyer for the medical establishments, Theodore B. Olson, pointed out a student involved in an ordinary work-study program is entitled to the tax exemption. A student's participation in such a program is not directly related to the subject matter of his education and is for the sole purpose of earning money.

By contrast, a medical student's only goal in working as a resident is to gain the specific education required for a medical license, not to earn money.

The crucial difference, Olson said, is medical residents "cannot achieve what they need to achieve for board certification and hospital privileges except by having clinical experience," that is, by performing the required hands-on work in the same field as their studies.

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Olson's implication is that if a person involved in a work-study program is entitled to an exemption according to the IRS definition of the term student, the medical resident should be even more so.

Olson said Mayo does not seek to challenge the IRS's requirement a tax-exempt person be predominantly a student and not an employee. Instead, Mayo maintains since medical students cannot earn their licenses without working as residents, residency should be considered part and parcel of the education process -- implying the distinctions of predominance on which the justices focused aren't truly at issue.


Matthew D. Roberts, the Justice Department attorney, said it's reasonable for the Treasury Department not to count work as study even if there's an educational aspect to it for three reasons.

First, the exemption is meant to be narrowly construed for students -- and that doesn't cover apprenticeships. It applies only to students doing work for a school, college or university where they are enrolled and regularly attending classes.

Second, people who are primarily employees working for long hours and a salary should be protected by Social Security by earning credit toward benefits in case they become disabled or die -- and they should, likewise, be contributors to the Social Security system.

Third, it would be difficult to determine on a case-by-case basis what an employer's purpose is in bringing in the individual for service and learning. Is the job to be performed more like study or more like work?

Roberts said the Treasury Department drew a bright line and decided if a person is working full time, that person is predominantly an employee and not covered by the exemption.

Chief Justice John G. Roberts earlier in the arguments had struck a similar note, saying, "This is basically a very familiar situation of an apprentice who is both an employee and a student," and that it makes sense to defer to the IRS in making such categorizations.


Olson reminded the justices the appellate courts are split on the issue. On the 8th U.S. Circuit Court of Appeals, medical residents may not be eligible for Social Security benefits. The matter is unclear on the other circuits.

Olson also cited a Social Security regulation that says if the main purpose is pursuing a course of study rather than earning a livelihood, a person is to be considered a student and the work is not considered to be employment.

Kagan won't be participating in the case.

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