FICA

Issues

Whether (1) Congress intended that the term “student” be given a broad construction under the Federal Insurance Contributions Act, and (2) the Treasury Department’s regulation construing “student” to exclude medical residents is arbitrary and unreasonable?

Court below

United States Court of Appeals for the Eighth Circuit

The Mayo Foundation is suing for a refund of FICA taxes paid on behalf of its medical residents. The IRS claims that medical residents are not students and thus are not eligible for the FICA exemption for student employment. The Treasury Department released regulations that deny the student exemption to any employee that works more than 40 hours per a week. The Mayo Foundation contends that the IRS’s interpretation of the term “student” is incorrect and contrary to congressional intent. If the court rules that medical residents are students, this could lead to significant tax savings for hospitals and residents while reducing the availability of worker protections for medical residents.

Questions as Framed for the Court by the Parties

Whether the Treasury Department can categorically exclude all medical residents and other fulltime employees from the definition of “student” in 26 U.S.C. § 3121(b)(10), which exempts from Social Security taxes “service performed in the employ of a school, college, or university” by a “student who is enrolled and regularly attending classes at such school, college, or university.”

FICA Tax

The tax dispute between the Respondent, United States of America (“IRS”), and the Petitioners, Mayo Foundation for Medical Education and Research, Mayo Clinic, and Regents of the University of Minnesota (“Mayo”), is over whether Mayo is responsible for paying

Written by

tlewi

okhan

Edited by

schon

Additional Resources

Inside Higher Ed, Doug Lederman: High Court to Hear Tax Case (June 2, 2010)

chamberofcommerce.org, Tax Information Guide

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Read more about Mayo Foundation v. United States

United States v. Quality Stores Inc.

Issues

Are supplemental unemployment benefits paid to laid-off employees considered “wages” under the Federal Insurance Contributions Act (FICA), and therefore taxable as income?

Court below

United States Court of Appeals for the Sixth Circuit

In 2001, Quality Stores made severance payments to employees who were involuntarily terminated after Quality Stores filed for Chapter 11 bankruptcy. Quality Stores later argued that the payments should not have been taxed as wages under the Federal Insurance Contributions Act (FICA). When the IRS did not respond to Quality Stores’ claim seeking a $1 million refund in FICA taxes, Quality Stores commenced an adversary action in bankruptcy court. The bankruptcy court ruled for Quality Stores, concluding that the severance payments were non-taxable supplemental unemployment benefits (SUBs). The district court and Sixth Circuit affirmed. The Supreme Court will determine whether severance payments to involuntarily terminated employees are taxable wages under FICA. The Court will resolve a circuit split between the Sixth and Federal Circuits in a decision that will affect all employers who provide severance pay. At stake are billions of dollars in FICA tax refunds to employers and their former employees.

Questions as Framed for the Court by the Parties

Whether severance payments made to employees whose employment was involuntarily terminated are taxable under the Federal Insurance Contributions Act (“FICA”), 26 U.S.C. 3101 et seq.

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Facts

In October 2001, involuntary Chapter 11 bankruptcy proceedings commenced against Quality Stores, the largest agriculture-specialty retailer in the United States at the time. See In re Quality Stores, Inc., et al., 693 F.3d 605, 608 (6th Cir. 2012).