The U.S. Supreme Court heard arguments on Monday from the Mayo Foundation, the University of Minnesota, and the Internal Revenue Service (IRS) in a dispute about whether medical residents should be required to pay taxes.

According to court documents, the Mayo Foundation and the University of Minnesota are suing the IRS, saying that the government entity shouldn't require them to collect taxes from medical residents.

The appeal, which was filed in June 2009 in the U.S. Court of Appeals, questions whether the government can categorically exclude medical residents and other full-time employees from the legal definition of “student.” The “student” definition would exempt them from paying taxes as long as they were attending classes regularly at a school, college, or university. Those who are now deemed “students” do get the exemption.

Mayo sued the IRS in 2005 over taxes paid for its medical residents following the enactment of the Treasury Regulation. Mayo won that case, but the ruling was later reversed in federal appeals court in favor of the IRS.

According to the Association of American Medical Colleges, the U.S. Treasury Department collects about $700 million in taxes each year from medical residents, which means the government would take a big hit if the Supreme Court were to rule in favor of Mayo and the University of Minnesota.

The Supreme Court on Monday seemed divided on the issue, according to media reports and the Associated Press.

“How do you draw the line between a student who is working and a worker who is studying?” Justice Sonia Sotomayor reportedly said.

The Associated Press said that Matthew Roberts, an assistant solicitor general, argued that the IRS should have the authority to decide who can be counted as a student and who cannot.

“If you're working full time, you're an employee and not a student,” Roberts reportedly said.

The Associated Press reported that Mayo's lawyer, former solicitor general Theodore Olson, said that the IRS' viewpoint on the matter-that anyone who works more than 40 hours a week at a hospital can no longer be classified as a student-was arbitrary and capricious.

A decision in the case is reportedly expected by June 2011.

Mayo is based in Rochester. More than 1,500 residents and fellows participate in its graduate medical education programs each year through its campuses in Rochester; Jacksonville, Florida; and Scottsdale and Phoenix, Arizona.

The University of Minnesota's medical school has more than 920 medical students and more than 800 residents and fellows. It offers residency programs at the University of Minnesota Medical Center, Fairview, and the University of Minnesota Amplatz Children's Hospital.