Does your hospital pay FICA taxes for its residents?(Legal Focus on Hospital Law Issues)

CASE ON POINT: United States v. Detroit Medical Center, 022609 Fed 6,07-1602 (2/26/2009)--MI

ISSUE: Does your hospital pay FICA taxes for its residents?

CASE FACTS: Detroit Medical Center (Detroit Center) operates seven hospitals in the Detroit metropolitan area. It sponsors a graduate medical training and education program jointly with Wayne State University (Wayne State). This program provides training to medical residents in numerous areas of medicine. In Michigan, two years of post-graduate medical training are required before a doctor can take a state medical board examination. Each resident signs a Residency Agreement that contractually sets forth the duties and responsibilities of Detroit Medical, Wayne State, and the resident. The resident agrees, among other things, to "provide care commensurate with his or her level of advancement and general competence" and to "assume responsibility for teaching and supervising other residents or students." Detroit Medical gives the resident an annual stipend of slightly more than $40,000, and also agrees to provide "living quarters" for residents on call, meals for "on call residents required to spend the night" and liability insurance. Detroit Medical receives, funding for its residency program from Medicare, Medicaid and Blue Cross. It does not charge patients for the care residents provide. The residents are supervised by a large number of physicians who are on the Wayne State faculty. The program is conducted in conformity with the standards promulgated by the Accrediting Council for Graduate Medical Education. In its federal tax returns for 1995 through 2003, Detroit Medical paid social security taxes for its medical residents' stipends. In 2004, Detroit Medical sought a refund of the taxies it paid for three quarters of 2003, which the United States Granted. On further review, however, the government concluded that the refunds had been erroneous. The United States sued Detroit Medical in the United States District Court for the Eastern District of Michigan to recover those refunds totaling more than $1.5 million. Detroit Medical counterclaimed for the social security taxes on the stipends it had paid for 1995 through 1997, 2002 and 2003. The District Court granted the government's motion for summary judgment, awarded the government the amounts it had refunded, and dismissed Detroit Medical's counterclaim. The court held that the stipends were not "wages," not "scholarships" or "fellowships" which allegedly were not subject to social security taxes. The court stated that "the residents' stipends are given as a substantial quid quo pro for patient care" because "residents are required to preform valuable patient care services." Detroit Medical appealed.

COURT'S OPINION: The United States Court of Appeals, Sixth Circuit, affirmed the judgment of the District Court in part, vacated it in part, and remanded the case back to the District Court. The court recognized the ultimate issue in the case as whether the Social Security Act covers physicians participating as residents in a graduate training program conducted by a hospital group jointly with a university. The court recognized that while this was essentially a tax case, the underlying question was whether the Social Security Act covered Detroit Medical's residents. The court observed that in determining the meaning of the applicable provisions of the Internal Revenue Code, the United States Supreme Court has pointed out: "The very specificity of the exemptions ... and the generality of the employment definitions indicates that the terms 'employment' and 'employee' are to be construed to accomplish the purposes of the legislation ... a constricted interpretation of the phrasing by the courts ... would invite adroit schemes by some employers and employees to avoid the immediate burdens at the expense of the benefits sought by the legislation." The case cited by the United States Supreme Court, stated in pertinent part," In dealing with the beneficent purposes of the Social Security Act, this court generally favors that interpretation of statutory provisions which call for coverage rather than exclusion." The court noted that that "exemptions from taxation are to be construed narrowly" and "do not rest upon implication," but "must be unambiguously proved." The court held, inter alia, that the residents were not given scholarships, or rewards for scholastic achievements, but were required to serve. Thus, the court concluded that Social Security Taxes were due and payable. The court found the remaining question to be whether the residents qualified as students, which is in a class exempt from FICA?

LEGAL COMMENTARY: The court noted that in identifying the issues, it did not limit the parties from developing the record in other ways and stated that nothing the court had seen limited the District Court from reaching a similar, or, different, conclusion in resolving a future summary-judgement. However, since the parties developed the record, the court urged the parties to supplement the record promptly, ask the District Court to resolve any summary judgment motions promptly and suggested that, if the losing party has a right of appeal, it seek expedited appellate review. The court affirmed the District Court resolution of the "qualified scholarship exception to FICA," vacated the judgment as to the "student" exception to FICA, and remanded the case to the District Court for further proceedings.

Meet the Editor & Publisher: A. David Tammelleo, JD. is a nationally recognized authority on health care law. Practicing law for over 40 years, he concentrates in health care law with the Rhode Island firm of A. David Tammello & Associates. He has presented seminars on medical, nursing and hospital law throughout the United States. In addition to his writings as Editor of Medical Law's, Nursing Law's & Hospital Law's Regan Reports, his legal articles have been published in the most prestigious health law journals. A prolific writer, his thousands of articles, as well as his achievements as an attorney and lecturer, have won him recognition in Martindale-Hubbell's Bar Register of Preeminent Lawyers, Marquis Who Who in American Law, Who's Who in America and Who's Who's in the World.

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