Court says medical residents' stipends may escape income and FICA taxes

A district court has held that there is no “per se” statutory rule that as a matter of law automatically prevents stipends paid by a hospital to medical residents from qualifying for the scholarship exclusion from income or the FICA student exclusion. However, the court also went on to say that whether these exclusions apply depends on the particular facts and circumstances in each individual case.

The district court held that whether the stipends are scholarships or eligible for the FICA student exception depends on the facts and circumstances of each case. First, the court rejected the IRS's argument that legislative history indicated that Congress intended that medical residents are covered by FICA and that such stipends can never be considered scholarships or eligible for the student exception. It also rejected that IRS stance that medical residents' stipends are not scholarships because a hospital extracts a quid pro quo from them.

A “qualified scholarship means any amount received by an individual as a scholarship...to the extent that the individual establishes that...such amount was used for qualified tuition and related expenses.” Thus, the court reasoned, the provision gives an individual an opportunity to prove that the amount received qualifies as a scholarship, rather than setting out a per se rule. The court stated that nothing in legislative history either stated or showed that Congress intended to make the stipends ineligible per se.

Finally, the district court also found the Internal Revenue Code (IRC Sec. 2121 (b)(10) unambiguous in that it didn’t categorically make stipends paid to medical residents ineligible for the exception.

For the FICA exception to apply the court ruled, the taxpayer or employer must only establish: (1) the service was performed in the employ of a school, college, or university; and (2) the service was performed by a student who is enrolled and regularly attending classes at such school, college or university.