Hospital Can’t Recover Millions from Residents

(CN) — A federal judge refused to let a New York City hospital recover $6.63 million that it had to pay resident physicians for not applying for tax refunds on their behalf.

Unfortunately for graduate medical residents, hospitals may withhold the employee share of Federal Insurance Contributions Act, or FICA, taxes from their paychecks and pay it to the government, according to the IRS.

This is because medical residents, also called resident physicians, are not eligible for the so-called student exception to the FICA tax, which applies to "service performed in the employ of . . . a school, college, or university . . . by a student who is enrolled and regularly attending classes."

While the scope of the exception was litigated for years, the IRS let employers file "protective" refund claims for the employer and employee shares of FICA taxes.

Plus, medical residents could file their own protective refund claims during that time.

But the New York and Presbyterian Hospital failed to file such claims or notify residents of their ability to do so, Cornell University medical residents claimed in a 2013 federal lawsuit.

The lawsuit says the hospital secretly contracted with the IRS to not file refund claims for the residents.

The residents said that amounted to fraud, constructive fraud, breach of fiduciary duty, negligent misrepresentation, negligence, breach of contract and unjust enrichment.

The hospital ultimately settled with the residents for $6.63 million late last year.

It sought to get that money back by refiling a federal complaint against the government this April, arguing that the feds must indemnify the hospital for the payments it made to the residents, under section 3102(b) of the Internal Revenue Code.

But the U.S. Court of Federal Claims granted the government's motion to dismiss Monday, finding that section 3102(b) is an immunity provision and thus not "money mandating."

The word "'indemnified' does not necessarily mean a right to 'reimbursement,'" Senior Judge Nancy Firestone wrote.

Dictionaries "nearly consistently defined 'indemnify' first to mean an exemption from liability," the judge added.

Numerous court decisions have read the provision as not authorizing a private right of employees to sue employers over the withholding and payment of FICA taxes, the ruling states.

"The court also finds the hospital's reliance on other cases which interpret the word 'indemnify' to support its reading of section 3102(b) unpersuasive," Firestone wrote. "None are tax cases and each deals with a specific statutory scheme that contemplated government payments."

The hospital's attorney, Maura Barry Grinalds with Skadden Arps Slate Meagher and Flom in New York, and Justice Department Tax Division attorney Matthew Lucey in Washington, D.C., did not return requests for comment emailed Tuesday.

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