Claims Court nixes “reimbursement” for FICA settlement

The Federal Claims Court has rejected a taxpayer’s suit to recover amounts paid to settle a dispute over FICA refunds. The court was not persuaded that Code Sec. 3102(b) required the IRS to “indemnify” the taxpayer for the amounts paid. Code Sec. 3102(b) provides that every employer required to deduct the [FICA] tax shall be liable for the payment of the tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer. According to the taxpayer, this provision required the IRS to indemnify or reimburse it for the payments.

The taxpayer, a hospital, employed medical residents. Because of uncertainty over FICA withholding for medical residents, some medical schools and teaching hospitals filed protective claims for future FICA refunds. In this case, the taxpayer had entered into a settlement with the IRS that resolved an unrelated tax dispute. As part of the settlement, the taxpayer agreed to give up its right to seek refunds for both the employer and employee portions of all FICA taxes paid on behalf of its medical residents through June 30, 2001. The taxpayer did not seek or obtain consent from the medical residents. The taxpayer also did not notify the medical residents that they could file their own protective claims. When the medical residents did learn of the settlement, the time to file FICA refund claims had expired. Several medical residents filed suit against the taxpayer. The medical residents and the taxpayer reached a settlement. The taxpayer then looked to the IRS for reimbursement.

The court found that Code Sec. 3102(b) is an immunity provision and is not a money-mandating statute. The word “indemnified” in the provision did not necessarily mean a right to “reimbursement,” according to the court. Further, the court found that Code Sec. 7422 precludes any court from considering an employee’s claim for recovery of FICA taxes before the employee files a claim with the IRS. Code Sec. 7422, the court found, works in tandem with Code Sec. 3102(b) by protecting employers from suits by employees while providing employees with an avenue for relief before the IRS. The court concluded that Code Sec. 3102(b) is not a reimbursement provision but is an immunity provision. (New York and Presbyterian Hospital, Plaintiff v. U. S., U.S. Court of Federal Claims, 2016-2 USTC ¶50,412.)

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