Medical colleges and teaching hospitals have challenged a Treasury Department regulation requiring them to pay Social Security taxes on behalf of medical residents in the Supreme Court.

Medical residents and other full-time employees do not qualify for general student exemption from Social Security taxes, under a 2005 Treasury Department rule. According to court papers, there are around 100,000 medical residents nationwide, whose tax treatment is at stake, as they owe $700 million in annual revenue to the federal government.

The Mayo Clinic and the University of Minnesota challenging the Treasury ruling are seeking a refund of the Social Security taxes already paid on behalf of medical residents.

Last June, the St. Louis-based 8th U. S. Circuit Court of Appeals sided with the IRS in its ruling.

The Mayo Clinic and University of Minnesota in their petition to the Supreme Court said four other federal appeals courts sided with hospitals on the issue, which leaves only the medical residents in the 8th Circuit covering Iowa, Arkansas, Missouri, Minnesota, North Dakota, Nebraska and South Dakota, having to pay taxes their peers elsewhere are not required to pay.

Representing 12.4% of wages, half of the Social Security tax is paid by the employer and half by the employee. A medical resident earning a $50,000 stipend, has to pay $3,100, with the same amount paid by the hospital also.

A number of other schools, including Georgetown University, Loyola University Medical Centre and the University of Tennessee support the challenge, and submitting their friends of the court briefs argue, residents are there to learn not provide services in hospitals, which means they are more like students, rather than employees.

It is of great significant administrative and fiscal importance, whether the Treasury is allowed to tax the medical residents, Elena Kagan, US Solicitor General wrote in the government's brief that opposes the petition.

Oral arguments will take place in the fall or the winter.