DOJ Argues That Medical Residents Are Not Exempt From FICA

June 28, 2007

IN THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

No. 07-1838

UNIVERSITY OF CHICAGO HOSPITALS,

Plaintiff-Appellee

v.

UNITED STATES OF AMERICA,

Defendant-Appellant

ON APPEAL FROM THE ORDER OF THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF ILLINOIS (No. 1:05-CV-05120 — HON. MATTHEW F.

KENNELLY)

BRIEF FOR THE APPELLANT

STATEMENT OF JURISDICTION

1. Jurisdiction in the District Court

This suit for refund of taxes paid under the Federal Insurance Contributions Act (FICA), §§ 3101, et seq. of the Internal Revenue Code of 1986 (26 U.S.C.) (the Code or I.R.C.)1 with respect to all quarters of the years 1995 and 1996 was brought by the University of Chicago Hospitals (taxpayer), a not-for-profit corporation incorporated in and having its principal place of business in Illinois. (A.8.)2 Taxpayer brought suit on behalf of itself and virtually all of its medical residents, who had consented to taxpayer’s making such claims on their behalf, as Treas. Reg. § 31.6402(a)-2(a)(2) allows. (A.9-10.) The gravamen of the complaint was that the residents are exempt from FICA coverage as “students” under § 3121(b)(10) of the Code. (A.10.)

Taxpayer’s administrative claims for refund, which were filed on April 15, 1999 for the quarters in 1995 and on April 13, 2000 for the quarters in 1996, were timely under § 6511(a) because they were filed within three years of April 15 of the calendar year succeeding each quarter in question, or the time when the returns were deemed filed, and the taxes paid, under Treas. Reg. § 31.6402(a)-2. (A.9-10.) Before filing suit, taxpayer allowed more than six months to elapse without action being taken on the refund claims, as § 6532(a)(1) requires. (A.10.) The District Court accordingly had jurisdiction over this case pursuant to § 7422(a) and 28 U.S.C. § 1346(a)(1).

2. Jurisdiction in the Court of Appeals

On September 8, 2006, the District Court issued an order denying the Government summary judgment on the question whether medical residents are categorically ineligible for the “student” exception. (App.2.) On January 30, 2007, however, upon motion by the Government, the District Court determined that the requirements for an interlocutory appeal under 28 U.S.C. § 1292(b) were satisfied, and it accordingly certified its order for appeal. (A.73-74.)

On February 2, 2007, the Government filed a timely petition for permission to appeal in this Court. A panel of this Court granted the Government’s petition on April 11, 2007. This Court’s jurisdiction rests on 28 U.S.C. § 1292(b) and Fed. R. App. P. 5.

The issues remaining for disposition in the District Court, which would be reached only if the Government does not prevail in this appeal, are (i) whether, even if residents may be considered “students,” their services are rendered “incident to and for the purpose of pursuing a course of study” within the meaning of Treas. Reg. § 31.3121(b)(10)-2(c); (ii) whether taxpayer or its hospitals (depending upon which is considered the employing entity) is a “school, college, or university” within the meaning of § 3121(b)(10) and, if not, then (iii) whether the employer is a supporting organization described in § 3121(b)(10)(B).

STATEMENT OF THE ISSUE

Whether medical residents are ineligible, as a matter of law, for the “student” exception to FICA tax coverage under § 3121(b)(10).

STATEMENT OF THE CASE

Taxpayer brought this suit for refund of FICA (Social Security and Medicare) taxes, seeking tax refunds of $2,757,915 for 1995 and $2,814,789 for 1996, plus interest, on the theory that services rendered by medical residents in caring for patients are excludable from covered “employment” under § 3121(b)(10) as “service performed in the employ of * * * a school, college or university, * * * if such service is performed by astudent who is enrolled and regularly attending classes at such school, college, or university.” (A.11-13.) The Government sought summary judgment, contending that residents are ineligible for the “student” exception as a matter of law. (Docs. 22, 24.) Taxpayer opposed this motion. (Doc. 26.) In an order unofficially reported at 2006 WL 2631974, the District Court (Judge Matthew F. Kennelly) denied the Government’s motion for summary judgment. (App.1-8.) Upon a motion by the Government (Doc. 45), the District Court later certified its order for interlocutory appeal (A.73-74), and this Court then granted the Government’s petition for permission to appeal.

STATEMENT OF THE FACTS

A. Taxpayer and its residency programs

Taxpayer operates three hospitals under its corporate umbrella: The Bernard A. Mitchell Hospital, the University of Chicago Children’s Hospital and the Chicago Lying-in Hospital. Since 1996, taxpayer has also operated the Duchossois Center for Advanced Medicine, an outpatient-care facility. (A.23-24, 29-39.) Taxpayer also had affiliation agreements with several other local hospitals. (A.24.) Taxpayer’s stated mission “is to provide superior health care in a compassionate manner, ever mindful of each patient’s dignity and individuality.” (A.24, 33, 42.)

Taxpayer maintained medical residency and fellowship programs for graduates of medical school, accredited by the Accreditation Council for Graduate Medical Education (ACGME), that train medical residents and fellows (both referred to here as residents) in certain specialties and subspecialties. Residency programs ordinarily last three years, but may last for up to seven years if the resident decides to pursue a subspecialty after completing one of the specialty residencies. The residency programs included internal medicine, emergency medicine, dermatology and neurology, while the subspecialty programs included cardiology and several programs in pediatrics. (A.24, 36-39.)

After accepting an appointment, a resident signs a contract between himself and taxpayer. (A.25, 55-59.) Under the terms of the contract, the resident is required to provide patient care services at one of taxpayer’s hospitals. (Ibid.) A “Fact Sheet for Housestaff” attached to the contract indicates that patient-care services provided by a resident are a considered a “full time obligation” and that “patient care activity outside the program is not in the best interest of the [resident] or the program.” (A.25, 60-61.) The hospital reserves the right to terminate the resident at any time for grounds specified in the contract. (A.25, 57-58.)

In addition, the contract provides that the hospital agrees to pay the resident an amount, called a “stipend,” that is dependent on the resident’s postgraduate year (PGY) and increases with each year of experience. (A.25, 46, 55.) For example, residents were paid from $41,300 to $52,000 per year for the year ending June 30, 2006. (A.25, 34-35.)

As part of a resident’s compensation package, taxpayer also provides the resident with several employee benefits. For example, taxpayer provides, free of charge to each resident, coverage under its professional liability (medical malpractice) insurance policy. Other benefits include access to pretax medical and dependent care spending accounts, long-term disability insurance, worker’s compensation, vacation and sick leave, health and dental insurance, life insurance, reduced-cost parking and free access to an employee assistance program. Residents may also voluntarily contribute pretax dollars to a retirement plan under § 403(b). (A.24-25, 63, 72.)

B. Taxpayer’s returns and refund claims

Taxpayer initially reported the salaries it paid to its residents as “wages” on Forms 941, Employer’s Quarterly Federal Tax Return, for all quarters of 1995 and 1996, paying the employer’s share and withholding the employee’s share of FICA taxes thereon. (A.9.) Taxpayer later filed claims for refund on behalf of itself and virtually all of its residents (A.11-13), contending that the residents’ compensation was not includable in the wage base because their services fell within the so-called “student” exception to FICA coverage found in § 3121(b)(10). (See, e.g., A.14-22.) After more than six months elapsed without any action its refund claims (A.10), taxpayer brought this suit (A.2, 8-13).

C. The proceedings in the District Court

1. The parties’ contentions

The Government moved for summary judgment, contending that medical residents are ineligible for the student exception as a matter of law. (Docs. 24, 25.) At the outset, the Government pointed out that the most natural reading of the word “student” does not encompass graduates of medical school. (Doc. 24 at 5-6 n.10.) Relying on the structure of the statute as a whole, the Government noted that, at the same time as it enacted the student exception in 1939, Congress also enacted an exception from coverage for medical interns and had expressly noted in an attendant committee report that the exclusion was to apply only to interns “as distinguished from a resident doctor.” (Id. at 14, quoting H.R. Rep. No. 76-728 at 49, reprinted in 1939-2 C.B. 538, 550; id. at 22.) The Government argued that the intern exception would have been superfluous from its inception if Congress had considered interns to be “students.” (Id. at 8-9, 13.) The Government also observed that an attempt by medical residents to invoke the “intern” exception had foundered in St. Luke’s Hosp. Assoc. v. United States, 333 F.2d 157 (6th Cir. 1964), and that, one year after that decision was handed down, Congress acted, not to restrict FICA coverage, but to expand it. The Government noted that, in order to afford adequate survivorship and disability protection to “young doctors” (Doc. 24 at 16, quoting from H.R. Rep. No. 89-213 at 95 (1965), reprinted in 1965-2 C.B. 733, 735), Congress repealed the intern exception, as well as anexemption that had applied to self-employed physicians (id. at 14-16). The Government also noted that, in any event, the statutory scheme was at least ambiguous, warranting resort to legislative history that indicated that the student exception was a narrow one, intended to relieve the administrative burden associated with paying FICA taxes on “nominal” amounts earned by students working “part-time or intermittent[ly].” (Id. at 9-10, citing H.R. Rep. No. 76-728 at 18 (1939), reprinted in 1939-2 C.B. 538, 543.) The Government contended that it would thwart congressional intent to allow residents to invoke the student exception. (Id. at 17-18.)

Taxpayer argued that medical residents are indeed eligible for the student exception. (Doc. 26 at 3-25.) Taxpayer contended that the fact that medical residents receive more than nominal compensation is immaterial. (Id. at 4, 19-21.) It pointed out that the plain language of the statute contained no such restriction and contended that there was no inherent ambiguity warranting reference to legislative history. (Id. at 5-19.) Taxpayer also relied upon an excerpt from Treas. Reg. § 31.3121(b)(10)-2(b) (26 C.F.R.) stating that “the amount of remuneration for services performed by the employee in the calendar quarter, the type of services performed by the employee, and the place where the services are performed are immaterial.” (Id. at 4, 19.)

In reply, the Government argued that the regulation’s provision that the amount of compensation is “immaterial” did not undercut the legislative intention that the services performed be nominal. (Doc. 33 at 3-9.) Instead, the Government argued that the reference merely implemented the repeal, in 1950, of a restriction in the student exception that, as originally enacted in 1939, had limited the availability of the exemption in the case of students employed by schools that were not tax-exempt entities to instances where the wages paid did not exceed $45 per quarter. (Id. at 4.) The Government argued that the regulation’s reference to the immateriality of the amount of remuneration paid was intended to clarify that the $45-per-calendar-quarter limit for services performed by students employed by taxable entities was no longer in effect, not that a person could be considered a student even if he earned more than a nominal amount. (Ibid.) Any other interpretation, the Government contended, would thwart Congress’s intention to cover doctors throughout their careers. (Id. at 8-9, 13-15.)

2. The District Court’s opinion

The District Court denied the Government’s motion for summary judgment. (App.1-8.) In addressing the Government’s motion, the court stated that “[t]he question presented here is primarily one of law: whether [taxpayer] is categorically barred from invoking the student exception with regard to wages paid to its medical residents.” (App.2.) The court observed that “the plain language of section 3121(b)(10) does not indicate whether medical residents are eligible for the student exclusion,” and it accordingly looked to the pertinent Treasury Regulation for guidance. (App.4.) In the court’s view, Treas. Reg. § 31.3121(b)(10)-2(b) is “unambiguous” and “clearly states that the amount of remuneration earned by an individual is immaterial to the applicability of the student exclusion.” (App.6.) Because it found the language of the regulation to be clear, the court opined that “there is no need to resort to other sources, such as the agency’s interpretation of its regulation or the legislative history of the underlying statute, to determine its meaning.” (Ibid.) The court also observed that, because Congress left intact a restriction on the amount of compensation earned by employees of tax-exempt organizations at the same time it repealed the restriction on earnings by students at schools that were not tax-exempt, Congress “knew how to limit the scope of various exclusions within the language of the Internal Revenue Code but opted not to do so with regard to the student exclusion.” (App.7.)

This appeal follows.

SUMMARY OF ARGUMENT

Sections 3101 and 3111 impose Social Security and Medicare taxes on “wages,” a term generally defined in § 3121(a) as all remuneration for employment. “Employment” is broadly defined in § 3121(b) as “any service, of whatever nature,” performed by an employee, except for certain stated exceptions. It is well settled that, in light of the broad remedial purposes of Social Security legislation, the courts must liberally construe the terms “wages” and “employment” and err on the side of finding coverage unless an exemption is beyond question.

In this case, taxpayer invokes the so-called “student” exception found in § 3121(b)(10), which excepts from “employment” service performed in the employ of a school, college or university, if it is performed by a student who is enrolled and regularly attending classes at that school. The District Court agreed with taxpayer that medical residents are not ineligible per se for this exemption. In its view, residents’ eligibility for the student exception must be determined on a case-by-case basis. In refusing to find medical residents categorically ineligible for the student exception, however, the court ignored clearly expressed congressional intent to cover medical residents, not to exempt them.

The student exception was enacted as part of the Social Security Amendments of 1939. At the same time, Congress enacted a separate exemption for medical interns. Both exceptions were intended to be de minimis and to apply only to individuals who worked part-time or intermittently for nominal wages. In an accompanying report, Congress expressly limited the intern exception to interns only, as opposed to resident doctors. Some years later, in St. Luke’s Hospital Ass’n v. United States, 333 F.2d 157 (6th Cir. 1964), the Sixth Circuit refused to extend the intern exception to residents, reasoning that to do so would thwart congressional intent. In response, Congress acted the next year, not to expand the intern exception to residents, but to repeal that exception, as well as one that had applied to self-employed doctors. Against this backdrop, the District Court erred in rejecting the Government’s position that taxpayer’s residents are categorically ineligible for the student exception. To begin with, it is fundamental that the words of statutes should be interpreted in their ordinary, everyday senses. It is scarcely the most natural reading of the word “student” to read it as applying to a medical resident, since a medical resident is no longer a medical student, but already has a medical degree. Similarly, hospitals are not “schools, colleges or universities” as those words are most commonly understood.

Further, the meaning of a statute is not to be determined in isolation, but only in the context of the statute as a whole. Nor should a statute be read so as to render any part of it superfluous. Since the intern and student exceptions were enacted at the same time, the apparent reason that Congress found it necessary to make an express provision for excepting interns from coverage was that it understood that the more general student exception did not cover them.

It is also significant that, after the Sixth Circuit refused to extend the intern exception to residents in St. Luke’s, Congress did not act to override that decision by extending the exception to residents. Instead, it did quite the opposite. It repealed the intern exception entirely, as well as a further exception for self-employed doctors. In doing so, it expanded the coverage of doctors to encompass the stages of their careers both before and after residency. The obvious implication of the repeal of the intern exception is that Congress already considered residents to be covered.

Even if the language and development of the statute were to be considered inconclusive, the statutory scheme is at the very least ambiguous, warranting consideration of the attendant reports as evidence of congressional intent. The statements that both the student and intern exceptions were intended to be de minimis and that the intern exception was not to apply to residents are compelling indications that Congress never meant to except residents from coverage. Moreover, the legislative history indicates that the student exception was intended to cover “part time or intermittent” work for “nominal” compensation. Medical residents work long hours treating patients, and, as taxpayer admits, they are paid more than nominal compensation in return. As a result, the District Court’s holding that eligibility for the student exception should be determined on a case-by-case basis is demonstrably at odds with clearly expressed congressional intent.

Significantly, the District Court did not deny that the statute itself is at least ambiguous. But it erroneously seized upon one word in Treas. Reg. § 31.3121(b)(10)-2(b) as allowing residents to invoke the student exception. To be sure, that regulation provides that the amount of remuneration paid is “immaterial.” But that language was meant only to acknowledge the 1950 repeal of a wage cap that had applied to students at non-tax-exempt schools, without undercutting the expressed intention that the exemption apply only to intermittent or part-time work for nominal wages. In any event, the same regulation further requires that the student’s services be performed “as an incident to and for the purpose of pursuing a course of study” (Treas. Reg. § 31.3121(b)(10)-2(c)), which suggests that the performance of services must be secondary to the course of study. Because residents’ services in treating patients are a “full time obligation,” they plainly do not meet this requirement.

The District Court’s order should be reversed.

ARGUMENT

The District Court erred in holding that medical residents are not ineligible for the “student” exception as a matter of law Standard of Review

This Court reviews a district court’s decision on “summary judgment, as well as its interpretation of the tax code, de novo.” 330 West Hubbard Restaurant Corp. v. United States, 203 F.3d 990, 994 (7th Cir. 2000).

A. Introduction

1. The statutory scheme

Section 3101 of the Code imposes income taxes relating to old-age, survivors and disability insurance and hospital insurance on the “wages” of an employee, and that tax is collected at the source and remitted to the Treasury by the employer under § 3102. Section 3111, in turn, imposes an excise tax on every employer, likewise with respect to “wages” paid. Because these taxes are imposed under the Federal Insurance Contributions Act, Chapter 22 of the Code, §§ 3101-3128, they are sometimes referred to as “FICA” or “Social Security” taxes, and those taxes support “important and extensive” Social Security and Medicare programs. See McDonald v. Southern Farm Bureau Life Ins. Co., 291 F.3d 718, 721724 (11th Cir. 2002); see also Dugan v. Sullivan, 957 F.2d 1384 n.7 (7th Cir. 1992).

The term “wages” is generally defined in § 3121(a) as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash,” except for certain payments described therein. “Employment” is defined in § 3121(b) as “any service, of whatever nature, performed by an employee for the person employing him,” with certain stated exceptions. These provisions, first enacted as part of the Social Security Act of 1935, Pub. L. No. 271, § 811(a) & (b), 49 Stat. 620, 639, impose taxes upon a broad range of employer-provided remuneration in order to accomplish the significant remedial objectives of the Social Security Act. See Helvering v. Davis, 301 U.S. 619, 641-44 (1947).

“It has long been a ‘familiar canon of statutory construction that remedial legislation should be construed broadly to effectuate its purpose.'” Sutton v. United Airlines, Inc., 527 U.S. 471, 507 (1999) (internal citations omitted)); see Freeman United Coal Mining Co. v. Summers, 272 F.3d 773, 778 (7th Cir. 2001). In keeping with this principle, and in light of the broad remedial purposes of Social Security legislation, the Supreme Court has repeatedly cautioned the courts against according a restrictive interpretation to the terms “wages” and “employment,” emphasizing that courts should err on the side of finding employees covered under Social Security, unless an exemption is beyond question. United States v. Silk, 331 U.S. 704, 711-12 (1947); Social Sec. Bd. v. Nierotko, 327 U.S. 358, 365 (1946). As the Supreme Court explained in Silk:

The very specificity of the exemptions * * * and the generality of the employment definitions indicates that the terms “employment” and “employee” are to be construed to accomplish the purposes of the [Social Security Act]. As the federal social security legislation is an attack on the recognized evils in our national economy, a constricted interpretation of the phrasing by the courts would not comport with its purpose. Such an interpretation would only make for a continuance, to a considerable degree, of the difficulties for which the remedy was devised and would invite adroit schemes by some employers and employees to avoid the immediate burdens at the expense of the benefits sought by the legislation.

331 U.S. at 711-12. Consistent with this directive, the courts have construed the Social Security Act liberally to accomplish its broad remedial purpose and accorded a narrow interpretation to exceptions thereunder. E.g., Appoloni v. United States, 450 F.3d 185, 190 (6th Cir. 2006); Associated Elec. Coop., Inc. v. United States, 226 F.3d 1322, 1327 (Fed. Cir. 2000); Mayberry v. United States, 151 F.3d 855, 860 (8th Cir. 1998).

And, because tax exemptions do not “rest upon implication,” United States Trust Co. v. Helvering, 307 U.S. 57, 60 (1939), but “must be unambiguously proved,” United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988), it is well settled that taxpayers bear the burden of establishing their entitlement to an exemption. E.g., Groves v. United States, 533 F.2d 1376 (5th Cir. 1976); Knapp v. Commissioner, 867 F.2d 749 (2d Cir. 1989). “[I]f ‘doubts are nicely balanced’ regarding the applicability of a tax exemption, the exemption must be accorded its more limited interpretation.” Tupper v. United States, 134 F.3d 444, 446 (1st Cir. 1998) (quoting Trotter v. Tennessee, 290 U.S. 354, 356 (1933)).

2. The “student” exception and its legislative context

It is well settled that the scope of “employment” as defined in § 3121(b) is very broad. As the Supreme Court has explained, “[t]he very words, ‘any service * * * performed * * * for his employer,’ with the purpose of the Social Security Act in mind, import a breadth of coverage.” Nierotko, 327 U.S. at 365 (quoting similar language in § 210(b) of the Social Security Act). Taxpayer nevertheless invokes the so-called “student” exception to “employment” found in § 3121(b)(10). That statute provides, in relevant part, that “employment” does not include:

(10) Service performed in the employ of —

(A) a school, college, or university,

* * * *

if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university * * *.

The meaning of the student exception should be interpreted by reading its terms in the context of “the language and design of the statute as a whole.” McCarthy v. Bronson, 500 U.S. 136, 139 (1991) (quotation omitted). An understanding of the genesis and evolution of the student exception is therefore essential to the disposition of this case.

i. The 1939 amendments

The student exception to the scope of “employment” had its genesis in the Social Security Act Amendments of 1939, ch. 666, § 1426(a) & (b), 53 Stat. 1360 (the 1939 Amendments). As originally enacted, the student exception consisted of two subsections, one pertaining to services performed by students for tax-exempt schools, colleges or universities, and the other to students performing services at non-tax-exempt entities of that nature. Id., ch. 666, § 606(a) & (b), 53 Stat. 1360, 1385 (codified, as amended, at I.R.C. § 1426(a) & (b) (1939 Code), Addendum, infra). At the same time, Congress enacted a separate exemption for student nurses and medical interns (id., ch. 666, § 606(b)(13) (codified as I.R.C. § 3121(b)(13) (1954 Code), Addendum, infra.3 After the 1939 Amendments, the term “employment” was defined as excluding, inter alia, the following types of service:

(10)(A) Service performed in any calendar quarter in the employ of any organization exempt from income tax * * * if * * * (iii) such service is performed by a student who is enrolled andregularly attending classes at a school, college, or university. [53 Stat. 1384-85 (codified at I.R.C. § 1426(b)(10)(A) (1939))]

* * * *

(10)(E) Service performed in any calendar quarter in the employ of a school, college, or university, not exempt from income tax under section 101, if such service is performed by a student who is enrolled and is regularly attending classes at such school, college, or university, and the remuneration for such service does not exceed $45 (exclusive of room, board, and tuition) [53 Stat. 1385 (codified at I.R.C. § 1426(b)(10)(E) (1939))]

* * * *

(13) Service performed as a student nurse in the employ of a hospital or a nurses’ training school by an individual who is enrolled and is regularly attending classes in a nurses’ training school chartered or approved pursuant to State law; and service performed as an interne in the employ of a hospital an individual who has completed a four years’ course in a medical school chartered or approved pursuant to State law. [53 Stat. 1385 (codified at I.R.C. § 1426(b)(13) (1939) (emphasis added)]

* * * *

The legislative history of the 1939 Amendments clarifies that the student and intern exceptions were intended to be narrow, de minimis exceptions to Social Security coverage. The legislative history indicates that the exemptions were generally directed at circumstances involving “nominal” wages earned for “part-time” or “intermittent” work. See H.R. Rep. No. 76-728 at 18, reprinted in 1939-2 C.B. at 543. Since the attendant “benefit rights” are also “inconsequential,” and “[m]any of those affected, such as students * * *, will have other employment which will allow them to build up insurance benefits,” the amendment was intended to simplify administration for all concerned. Ibid. (emphasis supplied). Moreover, in describing the intern exception, the House Report made a distinction between interns and residents. That report notes that only an “interne (as distinguished from a resident doctor)” is to be excluded from coverage. H.R. Rep. No. 76-728 at 49, reprinted in 1939-2 C.B. at 550-51 (emphasis supplied).

ii. The 1950 amendments

Congress made additional changes to the statutory scheme under the Social Security Act Amendments of 1950, ch. 809, 64 Stat. 477 (the 1950 Amendments). Among the changes were the elimination of the $45 cap on quarterly earnings that previously had applied to students working for non-tax-exempt schools, colleges or universities, and the consolidation of the two student exceptions into a single one. Id., § 204(a), 64 Stat. 529, 531. As amended, § 1426(b)(11)(B) of the 1939 Code provided, in language that, to this day, is used in defining the student exception, that the term “employment” did not include:

Service performed in the employ of a school, college, or university if such service is performed by a student who is enrolled and is regularly attending classes at such school, college, or university.

Significantly, in consolidating the two student exceptions, Congress clarified that it did not intend to change the substance of the exemption, making it clear that the student and intern exceptions “should continue” to be limited to circumstances where an eligible individual earns only “nominal” compensation for part-time or intermittent work. H.R. Rep. No. 81-1300 at 12-13 (1950), reprinted in 1950-2 C.B. 255, 260. The Senate Report contains similar language. S. Rep. No. 81-1669 at 15 (1950), reprinted in 1950-2 C.B. 302, 308.

The 1950 Amendments also enacted an exemption for student nurses, medical or dental interns and residents-in-training who were assigned to hospitals operated by the federal government (or the District of Columbia), but who were exempt from certain federal retirement and benefits laws. 1950 Amendments, § 204(a), 64 Stat. 528, 530 (codified at I.R.C. § 1426(b)(7)(C)(ix) (1939 Code)), incorporating by reference 5 U.S.C.§ 1052; H.R. Rep. No. 81-1300 at 129, reprinted in 1950-2 C.B. at 281; S. Rep. No. 81-1669 at 136, reprinted in 1950-2 C.B. at 341. In addition, the 1950 Amendments provided for coverage of most self-employed individuals, but not self-employed physicians. 1950 Amendments, § 208(a), 64 Stat. 540, 543 (codified at § 481(c)(5) (1939 Code) (see Addendum, infra).

iii. The 1965 amendments

Finally, under the Social Security Act Amendments of 1965, Pub. L. No. 89-97, § 311, 79 Stat. 286, 381, reprinted in 1965-2 C.B. 601, 605-06 (see Addendum, infra), Congress expanded the Social Security coverage of doctors. The legislative history clarifies that Congress had become increasingly concerned with the problem that many doctors were not protected by Social Security and that it wished to provide such protection. Congress therefore repealed the intern and self-employed doctor exceptions as part of its effort to increase the protections it believed were essential, particularly for “young doctors” lacking coverage for disability and survivorship benefits. H.R. Rep. No. 89-213 at 95, reprinted in 1965-2 C.B. at 735; 101 Cong. Rec. 16106 (1965) (statement of Sen. Ribicoff regarding the plight of a young widow and orphans of an intern who were left without Social Security benefits due to the intern’s lack of coverage). At the same time, Congress also repealed the exemptions, then found in §§ 3121(b)(6)(C)(iv) and 3121(b)(7)(C)(ii) of the 1954 Code, for services performed “as a medical or dental intern[s] or as a medical or dental resident in training” in hospitals operated by the federal and District of Columbia governments, respectively. 1965 Amendments, §§ 311(b)(4), 317(b)(3), 79 Stat. 381, 389; see H.R. Rep. No. 89-213 at 215-16, 225, reprinted in 1965-2 C.B. at 746-47, 752.

3. The District Court’s decision

Against this background, the District Court rejected the Government’s position that taxpayer’s medical residents are per se ineligible for the student exception. (App.1-8.) Although the court acknowledged that “the plain language of section 3121(b)(10) does not indicate whether medical residents are eligible for the student exception” (App.4), the court nevertheless failed to consider, much less address, the structure, context and purpose of the statutory scheme in concluding that residents may qualify for the student exception (App.1-8). Instead, the court relied on a single sentence of Treas. Reg. § 31.3121(b)(10)-2(c), stating that the regulation is “unambiguous” and “clearly states that the amount of remuneration earned by an individual is immaterial to the application of the student exception.” (App.6.) Based on its conclusion that the language of the regulation was clear, the court opined that “there is no need to resort to other sources, such as the agency’s interpretation of its regulation or the legislative history of the underlying statute, to determine its meaning.” (Ibid.) The court then stated that, even if the legislative history were relevant, it was “unclear” regarding the scope of the student exception. (App.7.)

The courts are split on the question whether medical residents are categorically ineligible for the student exception. The District Court’s conclusion, rejecting that proposition in favor of a case-by-case approach, is consistent with the decisions in United States v. Mt. Sinai Med. Ctr. of Fla., ___ F.3d ___, 2007 WL 1452156, No. 06-11693-GG (11th Cir. May 18, 2007) (Mt. Sinai II), vacating and remanding 353 F. Supp. 2d 1217 (S.D. Fla. 2005 (Mt. Sinai I), United States v. University Hosp., Inc., Case No. 1:05-CV-455 (S.D. Ohio July 13, 2006), Addendum, infra, Center for Family Med. v. United States, 456 F. Supp. 2d 1115 (D.S.D. 2006), Addendum, infra, and United States v. Mayo Found. for Med. Educ. and Research, 282 F. Supp. 2d 997, 1006 (D. Minn. 2003), as well as with dictum in Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998), which turned upon the scope of an agreement between the State and the Social Security Administration regarding coverage. The District Court’s conclusion is at odds, however, with the decisions in United States v. Detroit Medical Ctr., 2:05-CV-71722, 98 A.F.T.R.2d (RIA) ¶ 7995, 2006 WL 3497312, *9-14 (E.D. Mich. Dec. 1, 2006), appeal docketed, No. 07-1547 (6th Cir. April 24, 2007), Addendum, infra, Albany Med. Ctr. v. United States, 1:04-CV-1399, 2007 WL 119415, *2-5 (N.D.N.Y Jan. 10, 2007), appeal docketed, No. 07-0949-CV (2d Cir. March 15, 2007), Addendum, infra, and United States v. Memorial Sloan-Kettering Cancer Ctr., 1:06-CV-00026 (Tr. 37-39) (S.D.N.Y. Feb. 4, 2007), appeal docketed, No. 07-0926-CV (2d Cir. Mar. 16, 2007), Addendum, infra, as well as the decision of the District Court in Mt. Sinai I, supra, finding residents per se ineligible for the student exception.

As we shall demonstrate, the conclusion that residents cannot qualify for the student exception is the correct view. The District Court’s holding to the contrary is demonstrably at odds with the language of § 3121(b), its context in the statutory scheme, and the clearly expressed congressional intent that the student exception be narrow and de minimis in scope. Moreover, the court’s misinterpretation of Treas. Reg. § 31.3121(b)(10)-2, in concluding that residents’ eligibility for the student exception should be determined on a case-by-case basis, is an unworkable approach that frustrates clear congressional intent to cover doctors at all stages of their careers.

B. In rejecting a bright-line rule that medical residents are per se ineligible for the student exception, the District Court misinterpreted the language, context and purpose of the statutory scheme

1. The most natural reading of the statute as a whole (and as amended) is that medical residents are not “students” exempt from coverage

It is fundamental that “the words of statutes — including revenue acts — should be interpreted where possible in their ordinary, everyday senses.” Crane v. Commissioner, 331 U.S. 1, 6 (1947); Commissioner v. Soliman, 506 U.S. 168, 174 (1993). Further, “[t]he true meaning of a single section of a statute in a setting as complex as that of the revenue acts, however precise its language, cannot be ascertained if it be considered apart from related sections, or if the mind be isolated from the history of the income tax legislation of which it is an integral part.” Commissioner v. Engle, 464 U.S. 206, 223 (1984). Nor should legislation be read in a manner that renders any part of it superfluous. United States v. Menasche, 348 U.S. 528, 538-39 (1955); United States v. Alvarenza-Silva, 324 F.3d 884, 887 (7th Cir. 2003).

The District Court flouted these settled rules of statutory construction in holding that residents are not precluded from claiming the student exception. To begin with, it is scarcely the most natural reading of the word “student” to interpret it as applying to a medical resident. A medical resident is no longer a medical student, but already has a medical degree and has merely entered a post-medical school residency program at a hospital. The likelier assumption is that such a person no longer is a “student” as that word is most commonly understood. By the same token, taxpayer is most naturally understood to encompass, under its corporate umbrella, hospitals, rather than schools, colleges or universities in the most common sense of those words. See Memorial Sloan-Kettering, supra, at Tr. 37-38.

2. The District Court considered the student exception in isolation from the intern exception, which its construction renders surplusage

Moreover, the student exception is not to be read in isolation, but must be placed in the context of the entire statute and its development as a whole. Since the intern exception not only coexisted with the student exception, but was enacted at the same time, the obvious inference is that Congress made an express provision for excepting interns from coverage because it understood that the more general student exception did not cover them. See Detroit Med. Ctr., 2006 WL 3497312 at *13 (interns, students and residents “are distinct categories * * * that Congress intended to not overlap”); Albany Med. Ctr., 2007 WL 119415 at *2 (“Congress never intended medical residents to qualify for the student exception”). Put another way, if the student exception covered both students in medical school and medical residents, then it would also have necessarily covered interns, who are medical school graduates occupying the first rung of the physician employment ladder. In that case, however, a separate intern exception would have been entirely unnecessary. Detroit Med. Ctr., 2006 WL 3497312 at *13; Mt. Sinai I, 353 F. Supp. 2d at 1228.

Here, the District Court never mentioned the intern exception or even cited the decision in St. Luke’s. Nor did the Eighth Circuit in Minnesota v. Apfel. Those courts simply failed to come to grips with the problem that their construction of the student exception rendered the intern exception superfluous. The Eleventh Circuit in Mt. Sinai II, 2007 WL 1452156 at *4, commented that the intern exception was not redundant, even if interns were always students, if the employing hospital was not a school, college or university. But that reading is strained. If, as taxpayer argues, hospitals can be considered schools, treating interns as students would render the intern exclusion redundant at least to that extent, depriving it of much of its apparent force.

Significantly, after the Sixth Circuit held in St. Luke’s that residents did not qualify for the intern exception, Congress’s reaction was not to override that decision by extending that exception to residents. Instead, Congress repealed the intern exception entirely, together with a further exception for self-employed doctors, in the interest of expanding coverage of doctors to encompass the stages of their careers both before and after residency.4 See Albany Med. Ctr., 2007 WL 119415 at *4 (“when Congress made the relevant amendments, it did so with the intent to provide nearly universal coverage with limited exceptions”); Mt. Sinai I, 353 F. Supp. 2d at 1228 (excluding residents from coverage would be directly contrary to Congress’s expressly stated goal of expanding the Social Security coverage of “young doctors,” a group of which residents were clearly a part); Memorial Sloan-Kettering, supra, Tr. 39. The obvious implication is that Congress already considered residents to be covered. See Albany Med. Ctr., 2007 WL 119415 at *4 (finding it “improbable” that, when it repealed the intern exception, Congress intended interns and residents to qualify for the student exception sub silentio); Mt. Sinai I, 353 F. Supp. 2d at 1228 (“If Congress had intended to include residents within the student exception, Congress likely would have stated that it was overruling St. Luke’s.”). Rather than address the matter, the District Court simply ignored the repeal of the intern exception, and with it, the manifest legislative intent behind that act.

In short, on the face of the statute read as a whole, giving effect to every part and treating no provision as surplusage, the most plausible reading of the statute is that neither residents nor interns were ever intended to be eligible for the student exception. That reading is underscored by the evident congressional approval of the narrow reading of the intern exception in St. Luke’s, as is shown not only by its failure to override that decision to include residents in the intern exception, but by its decision to expand coverage further, beyond residents, to both interns and self-employed doctors. As a result, it is only logical to conclude that Congress never intended to except medical residents from coverage. The District Court simply closed its eyes to this patent evidence of Congress’s intent to cover medical residents.

3. At the very least, the statute is ambiguous, warranting reference to legislative history showing that medical residents were intended to be covered

The District Court agreed with the Government that § 3121(b)(10) is ambiguous, stating that its plain language “does not clearly indicate whether medical residents are eligible for the student exclusion * * * .” (App.4.) This aspect of its reasoning is consistent with the decisions in Detroit Med. Ctr., 2006 WL 3497312 at *8, Albany Med. Ctr., 2007 WL 119415 at *2. Indeed, of the courts that have addressed the issue, only the courts in Mt. Sinai II, 2007 WL 1452156 at *3, and University Hospital, 2006 WL 2129816 at *6, have considered the statute plain on its face.

In concluding (App.7) that the legislative history “is unclear regarding Congress’s intent with regard to the scope of the student exception,” the District Court in this case considered only an isolated portion of the statute’s context and evolution. It focused on the repeal, as part of the 1950 Amendments, of the quarterly cap on the earnings of students working for non-tax-exempt schools, colleges or universities, at the same time as the two student exceptions were consolidated into one. But as is discussed below, the court’s conclusion is demonstrably at odds with Congress’s clearly expressed intent that the student exception provide a narrow, de minimis exemption from coverage. As the legislative materials pertaining to the student exception and related statutory provisions make clear, Congress intended to cover medical residents under Social Security, not render them exempt.

In analyzing the coverage of medical residents in light of the student exception they invoke, the statutory language must be read in accordance with the remedial purpose of Social Security legislation as a whole, namely, to interpret coverage broadly and exceptions narrowly. Silk, 331 U.S. at 711-12; Nierotko, 327 U.S. at 365; Memorial Sloan-Kettering, supra, Tr. 38 39. The student exception must also be read narrowly in light of the principle “against interpreting federal statutes as providing tax exemptions unless those exemptions are clearly expressed.” Wells Fargo Bank, 485 U.S. at 354; United States Trust Co., 307 U.S. at 60; Mt. Sinai I, 353 F. Supp. 2d at 1224.

Adopting an approach that applies the student exception to residents on a case-by-case basis is irreconcilable with the statutory context and the legislative intent here. The statutory language, taken together with the context of later amendments, as well as the legislative history, demonstrate that the District Court’s reading of the student exception is inconsistent with Congress’s intent, both as to the coverage of doctors under Social Security and as to the limited scope of the student exception.

a. The statutory context and underlying legislative intent of the student exception

The 1939 Amendments created two general exceptions that are relevant here: the student exceptions and the medical intern exception (which was part of a provision that also contained an exception for student nurses). See 1939 Amendments, § 606(a) & (b) (student exceptions); § 606(b)(13) (intern and student nurse exceptions). The original student exception was enacted as two separate exceptions: one that applied to students who worked for tax-exempt schools, colleges or universities, and a second exception that applied to students who worked for non-tax-exempt schools, colleges or universities. The exception for students who worked at non-tax-exempt schools contained a $45-per-quarter earnings cap, while the other student exception contained no earnings cap.

Congress addressed the student and medical intern exceptions together in the legislative history. Both were intended to be de minimis exceptions narrow in scope. The House Report indicates that “[t]he intent of the amendment is to exclude those persons and those organizations in which the employment is part-time or intermittent and the total amount of earnings is only nominal, and the payment of the tax is inconsequential and a nuisance.” H.R. Rep. No. 76-728 at 18, reprinted in 1939-2 C.B. at 543. In other words, the student and intern exceptions were intended simply to provide the employer, the employee and the IRS with relief from the administrative burden associated with the reporting and payment of FICA taxes on very small wages received by students working only part-time or intermittently.

In 1950, Congress removed the wage cap that previously had applied to the exception for students who worked for non-tax-exempt schools, colleges or universities and, at the same time, it consolidated the two student exceptions into one. See 1950 Amendments, § 204(a). Although Congress also enacted an express exemption for the services of student nurses and interns (and residents) at hospitals operated by the federal government and the District of Columbia, it made no other substantive changes to the student or intern exceptions at that time. Ibid. The legislative history of the 1950 Amendments indicates that Congress intended the student and intern exceptions to continue to have the same narrow, de minimis application. In this regard, the House Report stated that “the legislation continue[s] to exclude service performed for nominal amounts in the employ of tax-exempt non profit organizations, service performed by student nurses and interns, and services performed by students in the employ of colleges and universities.” H.R. Rep. No. 811300 at 12-13, reprinted in 1950-2 C.B. at 260.5

Since the enactment of the 1950 Amendments, the student exception has remained substantially the same as it now appears in § 3121(b)(10). The history of the student exception is relevant, however, because it is replete with indications that allowing a resident who works full-time and receives pay far in excess of a nominal amount would frustrate Congress’s intent in enacting the exception in the first place. Detroit Med. Ctr., 2006 WL 349337312 at *13.

A review of the legislative history of the student exception, both as initially enacted in 1939 and as amended in 1950, makes it clear that Congress intended it as only a narrow, de minimis exception from coverage. The reports expressly state that only the “nominal” earnings of students who work on a “part-time” or “intermittent” basis were to be excepted. Indeed, nothing in the legislative history suggests that Congress intended the exception to be anything but a means of providing administrative relief from the burden of having to report “very small” wages.

Here, taxpayer’s residents worked full time and earned far more than “very small” salaries. (See A.25, 34-35, 46, 55, 61.) For example, residents were paid from $41,300 to $52,000 during the year ending June 30, 2006. (A.25, 34-35.) In addition, residents were informed that their patient care services at taxpayer’s hospitals were a “full time obligation” and, therefore, that moonlighting “is not in the best interest of the [resident] or the program.” (A.61.) There was, to be sure, an educational aspect to the residents’ on- the-job training, just as taxpayer also benefitted from the patient care services rendered by the residents. But the residents’ hours were not part-time or intermittent, and their pay certainly was not “nominal.” As a result, residents simply cannot qualify as “students.” See Mt. Sinai I, 353 F. Supp. 2d at 1224 (allowing residents to invoke the student exception would conflict with “the clear intent of Congress to reserve the student exception for students working few hours and earning nominal compensation”).

b. The intern exception

Likewise, although it was ignored by the District Court here, the history of the intern exception obviously is relevant in construing the applicability of the student exception. Although the court in Minnesota failed to consider it, and the court in Mt. Sinai II refused to do so, the history of the intern exception, and of its repeal as part of furthering the Congressional goal of expanding the coverage of doctors, are relevant concerns of the drafters that would be frustrated by recognizing residents as being eligible for the student exception.

The intern exception was repealed in 1965, one year after the Sixth Circuit handed down its decision in St. Luke’s. See 333 F.2d at 162-64. In that case, the court refused a hospital’s invitation to expand the intern exception to include residents. The court instead concluded, based on the legislative history of the intern exception, that Congress intended to single out interns alone for an exemption, not residents. Id. at 164. In so holding, the court reasoned that it was the legislature’s role to rewrite the exception to include residents, not the judiciary’s.

In the 1965 amendments, rather than extending the intern exception to residents, Congress acted to repeal the intern exception as part of its larger objective to extend Social Security coverage to doctors at all stages of their careers after medical school, not just the residency. See Social Security Amendments of 1965, Pub. L. No. 89-97, § 311. In repealing the intern exception, Congress explicitly mentioned a concern with Social Security coverage of “young doctors,” including interns within the term “young doctors.” Congress viewed young doctors as unlikely to have the disability and survivorship protection they needed from another source, if they were not covered. The House Report explains as follows (H.R. Rep. No. 89-213 at 95, reprinted in 1965-2 C.B. at 735):

The coverage of services as an intern would give young doctors an earlier start in building up social security protection and would help many of them to become insured under the program at a time when they need the family survivor and disability protection it provides. This protection is important for doctors of medicine who, like members of other professions, in the early years of their practice, may not otherwise have the means to provide adequate survivorship and disability protection for themselves and their families.

Similarly, the Senate Report explained (S. Rep. No. 89-404 at 112, reprinted in 1965-2 C.B. 758, 759):

Coverage would also be extended to services performed by medical and dental interns. They would be covered on the same basis as other employees working for the same employers.

In an attempt to blunt the effect of the repeal, the court in University Hospital, 2006 WL 2129816 at *8, observed that “Congress did not intend to foreclose interns from coverage under other subsections of § 3121,” and it relied on a sentence in the House Report to that effect. See H.R. Rep. No. 89-213 at 216, reprinted in 1965-2 C.B. at 747 (noting that the amendment’s effect “‘is to extend coverage under the [FICA] to such interns unless their services are excluded under provisions other than section 3121(b)(13)”). But immediately after making that remark, that report explains that an intern’s services are to be covered if he works for a hospital that is not tax-exempt under § 501(c)(3), as would also be the case if he were employed by a tax-exempt hospital that had a certificate in effect under former § 3121(k), waiving its exemption from the tax under former § 3121(b)(8). Ibid. When the statement is placed in context, therefore, it becomes apparent that Congress must have been referring not to the student exception, but to circumstances where an intern’s employer is exempt, in which case the employee will also be treated as exempt. Another such example would be service performed for a State that has not entered into a coverage agreement with the Social Security Administration. See I.R.C. § 3121(b)(7)(E).

At the same time as it repealed the intern exception, Congress further expanded coverage of doctors by repealing the exception that had applied to self-employed physicians. Social Security Amendments of 1965, § 311(b)(1), 79 Stat. 381. As is explained in the House Report (H.R. Rep. No. 89-213 at 95, reprinted in 1965-2 C.B. at 734-35):

Self-employed doctors of medicine are the only group of significant size whose self-employment income is excluded from coverage under social security. Large numbers of doctors have requested coverage. Your committee knows of no valid reason why this single professional group should continue to be excluded. It runs counter to the general view that coverage should be as universal as possible.

Given the clear congressional intent to cover young doctors under Social Security, it is simply implausible that Congress would provide coverage for interns and self-employed physicians, but would allow residents — young doctors working for several years between those two stages of practice — to escape coverage. Indeed, from the time the intern exception was first adopted in 1939, it has been clear that Congress intended residents to be subject to FICA taxes. The House Report explains that the intern exception applies to “services performed as an interne (as distinguished from a resident doctor) in the employ of a hospital by an individual who has completed a four years’ course in a medical school * * * .” H.R. Rep. No. 76-728 at 49, reprinted in 1939-2 C.B. at 55051 (emphasis supplied). If Congress had intended to exempt residents’ wages, in addition to those of interns, it could easily have so provided. Indeed, it did so for a time, but only in the case of services performed by residents at hospitals operated by the federal and District of Columbia governments. If it meant to enact a broad exclusion, applicable to all residents, Congress obviously would not have needed to make the very distinction it did between (exempt) interns and (covered) “resident doctors.”

Significantly, as part of the 1965 Amendments, Congress also repealed the exemptions that had applied to residents at hospitals operated by the federal and District of Columbia governments. 1965 Amendments, §§ 311(b)(4), 317(b)(3), 79 Stat. 381, 389; see H.R. Rep. No. 89-213 at 214-15, 225, reprinted in 1965-2 C.B. at 746-47, 752; S. Rep. No. 89-404 at 236, 243-44 (1965), reprinted in 1965 U.S.C.C.A.N. 1943, 2183. As amended, in provisions in effect to this day, services performed by interns and residents employed by hospitals operated both by the federal government (§ 3121(b)(6)(B)) and the District of Columbia government (§ 3121(b)(7)(C)(ii)) constitute covered “employment.”

Notably, in holding against the Government, the court in University Hospital, 2006 WL 2129816 at *7, misread § 3121(b)(7)(C)(ii) as excluding from employment services performed by interns and residents at the District’s hospitals. Its conclusion is infected by that error, because it relied upon the existence of that supposed exception in stating that its “conclusion that subsection (b)(10) does not exclude medical residents from its exception as a matter of law does not render that provision inconsistent with the rest of § 3121(b).” Ibid. Contrary to that court’s conclusion, both provisions — §§ 3121(b)(6)(B) and 3121(b)(7)(C)(ii) — are parallel in all key respects and provide for like exceptions from coverage for services performed “by any individual as an employee included under section 5351(2) of title 5, United States Code (relating to interns, student nurses, and other student employees of hospitals of” the federal government or the District of Columbia (as the case may be), “other than as a medical or dental intern or a medical or dental resident in training[ ] * * * [.]”6 Although service performed in the employ of a State generally is not covered (§ 3121(b)(7)), service in the District’s employ generally is covered, unless it is subject to a federal retirement system other than the Federal Employees Retirement System (§ 3121(b)(7)(C)), but such service still is not covered if it falls within the enumerated exceptions, one of which concerns student employees of District hospitals (§ 3121(b)(7)(C)(ii)), and even that exclusion applies only to such employees “other than” interns and residents (ibid.).7

Further, the court in University Hospital, 2006 WL 2129816 at *6, as well as the Eleventh Circuit in Mt. Sinai II, 2006 WL 1452156 at *4 & n.3 (which treated the University Hospital opinion as influential), were also misguided in finding it significant that Congress made express mention of residents in excluding them from an exception to coverage in § 3121(b)(6)(B), when it did not do so in § 3121(b)(10). Such express mention was necessary to accomplish coverage due to the interplay between FICA and the federal pay and benefits laws. Section 5351(2)(A) of Title 5, to which both §§ 3121(b)(6)(B) and 3121(b)(7)(C)(ii) refer (and which both incorporate by reference), includes among the persons listed as exempt from federal pay and benefits laws “a student nurse, medical or dental intern, resident-in-training, [and] student dietitian,” among others. As a result, since both statutes incorporate that list by reference, interns and residents, being listed, would have enjoyed the exemption unless they were specifically excluded by express language. Although both courts relied on the fact that Congress did not specifically exclude residents from the student exception, whereas it had carved them out from the exemption in § 3121(b)(6)(B), they failed to grasp that it was necessary to do so in the latter case, but not in the former.8

c. The decisions in St. Luke’s and Johnson City

The District Court’s refusal to consider the context and statutory history of the 1939 exceptions for students and interns is demonstrably at odds with the decisions of other courts that have concluded that consideration of such legislative history is essential to determining the relative scope of these provisions. For example, in St. Luke’s, 333 F.2d at 160-64, the Sixth Circuit concluded, based on the legislative history of the student and intern exceptions, that residents were not eligible for the intern exception and therefore were subject to FICA tax.

As is discussed above, under the 1939 Amendments, Congress enacted an exception for medical interns. Social Security Act Amendments of 1939, § 606(b)(13) (codified at § 1426(b)(13) of the 1939 Code and redesignated as § 3121(b)(13) of the 1954 Code). Self-employed physicians likewise were exempt from self-employment taxes. See, e.g., § 1402(c)(5) (1939 Code). As a result, students employed by their medical schools, medical interns, and self-employed physicians were exempt from coverage from 1939 until 1965, as were residents at hospitals operated by the federal and District of Columbia governments from 1950 to 1965, while residents at hospitals not operated by those governments remained subject to FICA taxes.

Apparently viewing the existence of coverage solely during the residency as an unjustified anomaly, St. Luke’s Hospital sued for a refund of FICA taxes. See St. Luke’s, 333 F.2d at 158. Relying on the intern exception, the hospital sought a refund of taxes paid on salaries of residents in their second and subsequent years of clinical training. The hospital contended that there was no longer any substantive difference between interns and residents, as had been true at the time of enactment in 1939, and that, consequently, residents were likewise exempt from coverage. Ibid.

The Sixth Circuit rejected the hospital’s contention. Id. at 163-64. The court did not dispute the fact that, in 1939, when Congress enacted the intern exception, a distinction had existed between residents and interns. Id. at 160-62. Indeed, the court noted that, when it created the exception, Congress had expressly distinguished interns from residents, singling out only interns, as opposed to “resident doctor[s],” for exemption from coverage. Id. at 163 (internal citations omitted). The Sixth Circuit also recognized that the distinction between interns and residents had blurred since 1939. Finally, the court acknowledged the anomaly of subjecting doctors to FICA taxes only during their residencies. Id. at 164. Nevertheless, the court refused to expand the intern exception to apply to post-internship residents, reasoning that “if there is warrant for doing so at all [it] is the function of legislation and not that of judicial interpretation.” Ibid.

When Congress acted one year later, it was not to exempt residents from coverage, as the hospital in St. Luke’s would have wished. Instead, Congress repealed the intern exception in its entirety. Social Security Act Amendments of 1965, § 311(b)(5). To be sure, as the court in Mt. Sinai II pointed out, 2007 WL 1452156 at *4, the court in St. Luke’s did not consider whether the student exception applied. The hospital in that case could, of course, have invoked the student exception as well, but it apparently felt that the residents had a stronger claim to the intern exception than to the student exception. At all events, the residents there were unsuccessful in advancing the claim of exemption they did raise.

In addition, in Johnson City Med. Ctr. v. United States, 999 F.2d 973, 975 (6th Cir. 1993), which involved the student-nurse exception under § 3121(b)(13) (which had also contained the intern exception), the Sixth Circuit also consulted the legislative history in determining the scope of the exemption. There, the court likewise concluded, unanimously, that that provision was ambiguous regarding the conditions required to qualify for the exception. 999 F.2d at 976 (majority); id. at 978 (dissent). The court accordingly relied on the legislative history of that exception, which is the same legislative history discussed above regarding the student and intern exceptions. The IRS ruled that the student-nurse exception applied only if the employment was substantially less than full-time, the total amount of earnings was nominal, and the only services performed were incidental parts of the student nurses’ training toward a degree. Rev. Rul. 85-74, 1985-1 C.B. 331-32. The majority agreed, reasoning that “[t]he revenue ruling simply reflects the legislative history of the statute, that the exception be granted to those student nurses who are receiving academic credit for their work.” 999 F.2d at 977.

4. A case-by-case approach to determining residents’ eligibility for the student exception is ill founded and unworkable

As we have shown, the statutory language and development are replete with indications that Congress never intended to exempt medical residents from FICA coverage except in the limited circumstances (now repealed) where it expressly so provided. These include the simultaneous enactment and coexistence of the student and intern exceptions, the decision in St. Luke’s refusing to extend the intern exception to residents, and the fact that Congress not only failed to override that decision, but also repealed the intern exception and, at the same time, expanded coverage to self-employed doctors (as well as federally-employed residents and interns). Against this backdrop, the courts in Detroit Medical Center, Albany Medical Center, Memorial Sloan-Kettering, and Mt. Sinai I were correct in adopting a bright-line rule precluding residents from invoking the intern exception.

Although there is some authority to the effect that residents are eligible for the student exception, those rulings are fundamentally misconceived and should not be followed. Minnesota v. Apfel, upon which the District Court relied (App.8), arose in the context of the interpretation of a contract between the Social Security Administration (SSA) and the State of Minnesota pursuant to 42 U.S.C. § 418. Under § 418, a state could negotiate with the SSA to cover its employees under Social Security. 151 F.3d at 744. Minnesota executed a § 418 agreement with the SSA in 1955, which Minnesota modified in 1958 to exclude residents’ services. Ibid. In 1990, however, the SSA determined that medical residents should be included under the agreement. Ibid.

The Eighth Circuit rejected the SSA’s argument that the Social Security Act Amendments of 1965 made the parties’ intent in 1955 irrelevant. It held, instead, that as a matter of contract law, the services rendered by residents were not included in the § 418 agreement. 151 F.3d at 746-47. The State also argued, in the alternative, that if residents were considered to be covered under the § 418 agreement, then a parallel student exception under the Social Security Act, 42 U.S.C. § 418(c)(5), which was added to the agreement in the 1958 modification, excluded the residents from coverage.9 Id. at 747. The Eighth Circuit agreed, although its holding was unnecessary to its resolution of the case as a contractual matter. Id. at 747-48.

Because Minnesota resolved the resident coverage issue as a matter of contractual interpretation, its discussion of the student exception was inessential to its holding and constitutes dictum. See Mt. Sinai, 353 F. Supp. 2d at 1229; Albany Med. Ctr., 2007 WL 119415 at *5 n.5; but see Detroit Med. Ctr., 2006 WL 3497312 at *7; Center for Family Med. v. United States, Civ. No. 50-4049 (KES) (D.S.D. Aug. 16, 2006). In any event, the alternative holding that the student exception was applicable is not well founded. The Eighth Circuit did not mention, much less address, the history or legislative intent of the student and intern amendments, not did it cite St. Luke’s.

In the second case, United States v. Mayo Found. for Med. Educ. and Research, 282 F. Supp. 2d 997, 1006 (D. Minn. 2003), a district court in the Eighth Circuit rejected the Government’s contention that medical residents are per se ineligible for the student exception in § 3121(b)(10). Id. at 997. In reaching its conclusion, the court in Mayo noted that it had already rejected the Government’s contentions in the unreported decision of the district court in the Minnesota case (Minnesota v. Chater, No. 4-96-756, 1997 WL 33352908 (D. Minn. May 21, 1997), aff’d sub nom. Minnesota v. Apfel, 151 F.3d 742). The court in Mayo noted that the Eighth Circuit in Minnesota had expressly rejected a bright-line rule in favor of a case-by-case approach. 282 F. Supp. 2d at 1007.

In the wake of Minnesota and Mayo, a second district court within the Eighth Circuit likewise adopted a case-by-case approach to determining residents’ eligibility for the student exception. See Center for Family Med., supra. Most recently, the Eleventh Circuit in Mt. Sinai II has agreed that a case-by-case approach is necessary. 2006 WL 1452156 at *4. See also University Hospital, supra (concluding that residents are not categorically ineligible for the student exception, but without adverting to a case-by-case approach). Like the District Court’s holding below, however, the decisions in Mayo, Center for Family Medicine, and Mt. Sinai II are misconceived for the same reasons as was the Eighth Circuit’s alternative holding on the student exception in Minnesota. As we have already explained, treating medical residents as eligible for the student exception is ill founded and flies in the face of the statute’s language, history, context, and purpose.

At all events, a case-by-case approach is unworkable, because it would require an analysis of the facts and circumstances in thousands of cases, a result that Congress could not have intended and one that is unwarranted based on the purpose of the student exception, as expressed in the legislative history. See Mt. Sinai I, 353 F. Supp. 2d at 1229 (observing that a case-by-case approach is “unworkable” in view of the fact that more than 7,000 claims, seeking refunds of over $1.135 billion in FICA taxes, had been filed with the IRS since the decision in Minnesota). Because virtually all residents work full-time positions and receive pay far in excess of a nominal amount, considering residents’ eligibility for the student exception on a case-by-case basis would not be feasible.

In sum, an interpretation that would except medical residents from Social Security coverage would “produce a result demonstrably at odds with the intentions of [the] drafters” of § 3121(b)(10). Samuels, Kramer & Co., Inc. v. Commissioner, 930 F.2d 975, 979 (2d Cir. 1991); see also Mt. Sinai, 353 F. Supp. 2d at 1227; Albany Med. Ctr., 2007 WL 119415 at *4-5; Detroit Med. Ctr., 2006 WL 3497312 at *13. In light of the history and context of the statutory scheme, as well as the congressional intent to provide as broad coverage as possible to the workforce under the Social Security Act, the District Court’s conclusion that residents’ eligibility for the student exception must be determined on a case-by-case basis cannot stand.

5. Treas. Reg. § 31.3121(b)(10)-2 does not support the District Court’s holding that residents’ eligibility for the student exception should be determined on a case- by-case basis

The District Court’s holding that residents’ eligibility for the student exception should be determined on a case-by-case basis rests solely on the court’s erroneous interpretation of a single sentence in Treas. Reg. § 31.3121(b)(10)-2, read in isolation. (App.5-8.) Rather than reading the regulation as a whole, and in light of the relevant statutory language, development and legislative history, the court based its decision upon the first sentence in Treas. Reg. § 31.3121(b)(10)-2(b), which states, in pertinent part, that “* * * the amount of remuneration for services performed by the employee in the calendar quarter * * * [is] immaterial.” (App.5.) The court concluded that the regulatory language is “unambiguous” and that, consequently, it was not necessary to consider the legislative history of the student exception.10 (App.6-8.) Observing that the legislative history was at all events “unclear regarding Congress’s intent with regard to the scope of the student exclusion * * *,” the court opined that it “cannot find that a literal interpretation of the Treasury Regulation, which comports with the language of the statute, would cause an absurd result or thwart the purposes of the statute.” (App. 7-8.) The District Court’s interpretation of Treas. Reg. § 31.3121(b)(10)-2 is fundamentally at odds with the clear expression of congressional intent concerning the limited scope of the student exception.

As in effect with respect to the quarters at issue, Treas. Reg. § 31.3121(b)(10)-2(c) provides that the student exception under § 3121(b)(10) applies only to services of an employee rendered to a school, college or university “as an incident to and for the purposes of pursuing a course of study at a school, college, or university.” Under Treas. Reg. § 31.3121(b)(10)-2 and rulings in effect for the years at issue, the IRS has indicated that if the service aspect of an employee’s relationship with the school, college or university is predominant, the employee’s service will not be considered “incident to” and for the purpose of pursuing a course of study. See generally Treas. Reg. § 31.3121(b)(10)-2 (preamble, ¶ 3 (describing requirement under regulations effective for years at issue)); see also Johnson City, 999 F.2d at 976-978 (approving Revenue Ruling that required the wages to be nominal, the work part-time or intermittent, and academic credit to be given for student nurse exception to apply); see also Rev. Proc. 98-16, 1998-1 C.B. 403 (addressing the student exception’s application to institutes of higher education in situations not involving medical residents).11

To begin with, the applicable regulation’s facts-and-circumstances approach applies only with respect to those individuals who have met the threshold requirements for the student exception, a fact ignored by the Eleventh Circuit in Mt. Sinai II, 2007 WL 1452156 at *5 n.2. Since, as previously shown, Congress has determined that medical residents and interns are not eligible to claim the student exception, the regulation simply has no application to them. The Treasury has consistently taken this position, and at any rate the issue never arose until after the Minnesota decision. See Preamble to Proposed Amendments to Treas. Reg. § 31.3121(b)(2)-1 and Treas. Reg. § 31.3121(b)(10)-2, 69 Fed. Reg. 8604 (Feb. 25, 2004).

Revenue Procedure 98-16, 1998-1 C.B. 403, at § 3.04, also supports this conclusion. Although this guidance states that it does not apply to medical residents, it properly interprets Treas. Reg. § 31.3121(b)(10)-2 as applying only in the event the employee is otherwise eligible for the student exception (“if the employee * * * has the status of student, * * * then * * *” (emphasis supplied)).

A close examination of the new regulation that does not apply to the instant quarters, see p.63 n.11, supra, reveals that it also takes what is, in effect, a per se approach, in that it carries out the congressional intent of precluding medical residents and interns from being eligible for the student exception. It provides that anyone who works 40 hours per week or more is ineligible for the student exception, and no examination of the relevant facts and circumstances is necessary. Since no medical resident or intern today works less than 40 hours per week (see, e.g., Mt. Sinai I, 353 F. Supp. 2d at 1220-21; see also A.61), the new regulation, when all relevant portions are considered, in effect creates a per se rule that residents and interns do not qualify for the student exception.

At all events, the District Court’s interpretation of the regulation is erroneous and plainly at odds with Congress’s clear intent to cover medical residents. Rather than working on a part-time or intermittent basis, medical residents work long hours treating patients, and (as taxpayer admits (A.23-27, 53)) they are paid more than nominal compensation in return. The student exception was intended to be limited to employment that is “part time or intermittent and [for which] the total amount of earnings is only nominal.” H.R. Rep. No. 76-728 at 18, reprinted in 1939-2 C.B. at 543. Although Congress lifted the quarterly wage cap that had applied to services performed for non-tax-exempt schools, colleges or universities in the 1950 Amendments, Congress still considered the exemption to be limited to “service performed for nominal amounts.” H.R. Rep. No. 81-1300 at 12-13, reprinted in 1950-2 C.B. at 260; see S. Rep. No. 81-1669 at 15, reprinted in 1950-2 C.B. at 308.

Significantly, in construing the student-nurse exception that was once part of the intern exception, even the dissenting judge in Johnson City agreed with the majority that the Revenue Ruling there at issue was correct in limiting the availability of that exception to situations where the employment was substantially less than full-time. See 999 F.2d at 977-78 (majority); id. at 983 (Batchelder, J., dissenting) (noting that this requirement “is derived from the general statement in the legislative history that Congress was not intending to exempt wages from a full-time job, but simply earnings from part-time work, which, in the aggregate, could be described as ‘nominal'”). That student-nurse exception had its genesis in the same legislation, and shares the same legislative history, as the student and intern exceptions. By the same token, then, the congressional intent that services be performed on a part-time or intermittent basis in order to qualify for exemption applies with equal force to the general student exception as it does to the student-nurse exception.

Although, as the District Court observed (App.6), the applicable Treasury Regulation provides that the amount of remuneration paid is “immaterial,” Treas. Reg. § 31.3121(b)(10)-2(b), the regulation further requires that the employee’s services be performed “incident to and for the purpose of pursuing a course of study,” Treas. Reg. § 31.3121(b)(10)-2(c), suggesting that the performance of services must be secondary to the course of study. After all, the term “incident” means “[a] dependent, subordinate, or consequential part (of something else).” Black’s Law Dictionary (8th ed. West 2004); cf. Treas. Reg. § 31.3121(b)(10)-2(d)(3), 2005-1 C.B. 261 (explaining that in order for services to be “incident to” the pursuit of a course of study, the educational aspect of the employee’s relationship must be “predominant”). Because a resident’s patient-care services at one of taxpayer’s hospitals are a “full time obligation” (A.25, 6061), they plainly are not secondary or incident to educational study. Moreover, reading the provisions of the regulation together, the reference to “immateriality” of compensation is sensibly read as intended simply to effectuate the repeal of the limitation that had applied only to students employed by non-tax-exempt schools, colleges or universities, without disturbing the overarching legislative intent that the student exception continue to apply only to wages that are nominal — or “incident to” — the course of study. Cf. Treas. Reg. § 31.3121(b)(10)-1(a) with Treas. Reg. § 31.3121(b)(10)-2(b).12

CONCLUSION

For the foregoing reasons, the District Court’s order should be reversed.

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