Detroit Medical Center Not Entitled to Refund of Taxes Paid on Medical Residents’ Stipends – Sixth Circuit

Holding:

The U.S. Court of Appeals for the Sixth Circuit upheld a district court’s ruling that stipends provided by Detroit Medical Center (“DMC”) to its medical residents were wages and not scholarships or fellowships, and therefore should form part of taxable income. Citing a Supreme Court precedent, the Sixth Court held that since the medical residents were required to provide both patient care and teaching services, the stipends cannot be viewed as “no strings” educational grants, with no requirement of any substantial quid pro quo from the recipients” that characterizes “scholarships” and “fellowships.” On this basis, the Sixth Circuit concluded that amounts received by medical residents in exchange for their quid pro quo services were taxable “compensation” rather than excludable “scholarships.” The Sixth Circuit however reversed the ruling of the U.S. District Court for the Eastern District of Michigan that DMC’s medical residents could not be classified as “students,” and therefore not qualified for exemption from social security tax. On this issue, the Sixth Circuit remanded the case in order for the district court to determine whether the residents fall under that term. The Sixth Circuit reasoned that it needed to know what the residents in the program do and under what circumstances to be able to make such determination.

Detailed Summary:

Defendant-appellant DMC 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.

In its federal returns for 1995 to 2003, DMC paid social security taxes on its medical residents’ stipends. In 2004, Detroit Medical sought a refund of the taxes it paid for three quarters of 2003, which the United States granted.

On further review,…

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