Barnabas gets $20 million in tax refund after court decision

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The Barnabas Health System is slowly reaping the rewards of a tax fight that covers 18 years.

Through a lawsuit filed in 2009 on behalf of the system's teaching hospitals by Bressler, Amery & Ross, P.C., Barnabas has recovered more than $20 million in Federal Insurance Contributions Act taxes paid between 1995 and 2005 on medial residents' stipends.

Mark McMenamy, partner with Bressler, Amery & Ross, said the Barnabas system followed the lead of other top teaching institutions, such as the Mayo Clinic, in looking at whether stipends paid to residents counted as wages paid on the salaries of students, which were exempt from FICA taxes until 2005.

McMenamy said Barnabas' accounting firm, Withum, Smith, & Brown, PC, in 1998 began filing refund requests for taxes on residents' wages from 1995, before a three-year deadline to file. The firm kept routinely filing the refund requests through 2005. However, the Internal Revenue Service did not move on the refunds until a court decided recently the exact amount owed to Barnabas and its residents.

The crux of the case was whether medical residents are considered students; in the Third Circuit Court of Appeals, it was argued that residents must supply grades, be formally admitted, interview with faculty, attend lectures and work their way through to graduation.

McMenamy said other hospitals that did not file tax abatement requests previous to 2008, though, would not be able to get FICA taxes returned, because there is a three-year deadline. When the Justice Department issued a statement in 2010 that medical residents were considered students up until 2005, it was too late for many teaching hospitals to apply.

"Although many teaching hospitals did file timely requests for refund and abatement, we believe the overwhelming majority did not," McMenamy said, adding that the early action by the Withum, Smith & Brown as well as the timing of the litigation worked heavily in Barnabas' favor.

In addition to the $20 million returned to the teaching hospitals, nearly $12 million in refunds were awarded to residents at the hospitals from 1995-2005. McMenamy said his firm spent many hours trying to find the former residents, and most of the doctors who will receive refunds trained at a Barnabas hospital from 2000-2005.

The refunds have come in slowly, with each teaching hospital being processed individually. St. Barnabas Medical Center, Monmouth Medical Center and the now-closed Union Hospital have been fully reimbursed, and Newark Beth Israel is in the process or receiving the funds from the IRS.

Barry Ostrowsky, president and CEO of Barnabas, said the refunds that came back to the hospitals are going into the general fund, as that's where the taxes had been paid out from.

"It couldn't come at a better time," Ostrowsky said.

Lead attorney on the case for Bressler, Amery & Ross was Michael Ostrowsky, brother of Barry Ostrowsky.

On Twitter: @mcaliendo33

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