Medical Center Argues Residents Qualify for Student FICA Exception

Amicus answers "yes."

I. CONCISE STATEMENT OF THE IDENTITY OF THE AMICUS CURIAE, ITS INTEREST IN THE CASE, AND THE SOURCE OF ITS AUTHORITY TO FILE.

The Detroit Medical Center's motion for leave to file this amicus brief is pending before the Court.

The Detroit Medical Center (DMC) is a Michigan non-profit corporation and a 501(C)(3) charitable enterprise. The DMC operates several "safety-net" hospitals in the city of Detroit. Those hospitals provide care for more than 100,000 indigent patients annually, totaling some $260 million of hospital care in 2005. The DMC in conjunction with Wayne State University operates one of the nation's largest graduate medical education programs with roughly 1,000 residents and fellows.

In April 2005, the United States sued the DMC seeking to recover millions of dollars in FICA tax which the IRS had refunded to the DMC in recent years. United States v. Detroit Medical Center, Eastern District of Michigan No. 2:05-cv-71722 (Hon. Arthur Tarnow). The DMC understands that one of the reasons it was selected for litigation, among many hospitals which received such refunds, was the United States' belief that Sixth Circuit case law was favorable to the argument adopted by the district court in this case. Although the DMC disagrees with the United States' position, there is no doubt that the United States will attempt to use a favorable decision in this appeal against the DMC in the Michigan litigation.

In ruling on this case, this Court should be aware that its decision may impact graduate medical education programs across the nation, including those of major teaching hospitals such as the DMC. The critically important work carried out by major teaching hospitals is explained in exhibit 1, which is an excerpt of a 2004 publication by the Association of American Medical Colleges ("AAMC") titled "The Handbook of Academic Medicine -- How Medical Schools and Teaching Hospitals Work." The publication notes that while 1,100 hospitals nationwide are involved with medical education, "the bulk of research and training, including three-fourths of all residency training, is concentrated in the approximately 400 hospitals and health systems that are members of the AAMC's Counsel of Teaching Hospitals and Health Systems (COTH). In 2004, COTH members included 281 short-term, nonfederal hospitals, 19 children's hospitals, 12 other specialty hospitals * * * and 64 of the 116 VA medical centers." Ex. 1, p. 7.

The publication goes on to explain that many of COTH's member teaching hospitals, like the DMC, are true safety-net providers:

The AAMC publication further explains that the burdens imposed on major teaching hospitals by teaching, research, and indigent care have caused financial hardship. In fiscal year 2001, major teaching hospitals' aggregate total margin was only 1.1%, whereas total margins for other teaching and non-teaching hospitals were 3.5% and 4.9% respectively. Ex. 1, p. 44.

DMC has been particularly hard hit. DMC's focus on education and research, as well as its role as Michigan's primary safety net provider, has wreaked havoc with its finances. During the period 1998-2003, DMC sustained operating losses of almost $500 million. With the assistance of a "one-time" state support payment, and much hard work under a new CEO, DMC "broke even" in 2004. However, new Medicaid cuts are now on the horizon at both the state and federal levels. Clearly, the funds at issue in the DMC's litigation are of critical importance to DMC and its charitable mission. The DMC respectfully submits this brief so that this Court will be aware of the potential nationwide impact of its decision, including its impact on major teaching hospitals such as the DMC.

II. SUMMARY OF THE ARGUMENT

Section 3121(b)(10) of the Internal Revenue Code exempts from FICA taxation "services 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." Mt. Sinai and the DMC contend, and recent case law holds, that residents qualify as students under the plain language of the statute and regulations. Nevertheless, the district court held that, as a matter of law, residents cannot seek to rely on the exemption.

The district court ignored the text of the statute and regulations and relied on purported legislative history from 1965 and earlier. The district court's reliance on legislative history to effectively amend the student FICA exemption, and make it unavailable to one class of students (residents), is clearly erroneous under decisions of this Court and the Supreme Court.

Moreover, even if it was proper to rely on legislative history, and it is not, the legislative history does not support the district court's decision. The district court relied primarily on the fact that in 1965, Congress repealed a special FICA exemption for "interns." However, nothing in the legislative history suggests -- let alone states -- that Congress thereby intended to foreclose residents from relying on the student FICA exemption -- if they qualified as students. To the extent the legislative history speaks to this issue at all, it suggests that Congress intended to eliminate the special FICA exemptions then available to interns and certain physicians, but not to preclude residents from relying on generally available exemptions including the student FICA exemption.

Finally, the district court's speculation about Congressional intent from 1965 is particularly inappropriate because, whatever unspoken views members of Congress may have then held as to whether residents might qualify as students, are now completely outdated. There have been dramatic changes in graduate medical education since 1965. As a result, medical residents now clearly qualify as students under the plain language of the statute and regulations.

III. ARGUMENT

Residents at DMC's teaching hospitals, all of whom are students enrolled with Wayne State University, clearly qualify as students under the cited statute and applicable regulations. See Minnesota v. Apfel, 151 F. 3d 742 (8^th Cir. 1998), and United States v. Mayo Foundation, 282 F.Supp. 2d. 977 (D.Minn. 2003). In each of those cases, the court rejected the position adopted by the district court here and held that the residents qualified as students. Those courts reached their conclusions by examining the facts and circumstances of the residency programs before them. That is exactly what the IRS itself advocated in a July 2000 Chief Counsel Advice Memorandum, which held: "[w]hether a resident is a student depends upon examination of all the facts and circumstances." Ex. 2, at *77.²

In this case, the district court did not even address the question whether residents are students. Rather, the court reasoned that Congress' 1965 repeal of the so-called FICA intern exemption (and a FICA exemption for self-employed physicians) evidenced Congress' intent that residents, as a matter of law, can never qualify under the student FICA exemption. In reaching that result, the district court simply ignored the text of the statute and the regulations. The court also failed to discuss or even acknowledge the rulings of this Court and the Supreme Court which either reject or sharply limit reliance on "legislative history." The district court's reliance on pure speculation about Congressional intent, for the purpose of effectively amending the student FICA exemption so as to make it unavailable to one class of students (residents), is clear error and should be reversed.³

Primetime argued that the Improvement Act allowed it to distribute the network programming because there had in fact been a "termination" prior to October 31, 1999. The networks argued that Primetime did not have the right to distribute the programming because the termination had been voluntary, and the legislative history to the Improvement Act demonstrated that only involuntary terminations qualified.

This Court agreed with Primetime. The Court began its opinion by citing recent decisions of the Supreme Court and this Court which sharply limit the use of legislative history. Ratzlaf v. United States, 510 U.S. 135, 147, 114 S.Ct. 655, 662 (1994), ("Even where 'there are * * * contrary indications in the statute's legislative history * * * we do not resort to legislative history to cloud a statutory text that is clear."); United States v. LaBonte, 520 U.S. 751, 757, 117 S.Ct. 1673, 1677 (1997), ("We do not start from the premise that [the statutory] language is imprecise. Instead, we assume that in drafting legislation, Congress said what it meant."); United States v. Veal, 153 F.3d 1233, 1245 (11^th Cir. 1999), ("Review of legislative history is unnecessary unless a statute is inescapably ambiguous."). CBS, Inc., supra, 245 F.3d 1217, 1224, 1225, emphasis added.

Because the networks could not demonstrate that the statute was "inescapably ambiguous," they instead argued that the "any termination" language should be construed in light of "surrounding circumstances." When so construed, the networks argued, its "plain meaning" supported the networks' position. The Court emphatically rejected that argument:

The statute clearly does not preclude residents from relying on it and the district court does not identify any ambiguity justifying resort to legislative history. The fact that Congress in 1965 repealed an entirely separate exemption is irrelevant to the question whether residents today may qualify for the student FICA exemption. If Congress in 1965 had intended to preclude residents from forever relying on the student FICA exemption, "it could easily have done so, but did not." CBS, Inc., supra. 245 F.3d 1217, 1228.

The district court spends considerable time discussing its view of the historical development of various FICA exemptions. The court fails to cite a single statement of Congressional intent suggesting that residents were to be precluded from qualifying for the student exemption -- and there is none. Indeed, the court's discussion not only is irrelevant, it is demonstrably false. The court concludes its discussion by "finding" that "interpreting the student exception to include medical residents would conflict with the clear intent of Congress to reserve the student exception for students working few hours and earning nominal compensation * * *." United States v. Mount Sinai Medical Center of Florida, Inc., 353 F.Supp. 2d 1217, 1227 (S.D.Fla. 2005). That statement is remarkable because only a few pages earlier the court acknowledged that in 1950, Congress eliminated any limit on remuneration applicable to the student exception. Id,, at p. 1224. The IRS' regulations, consistent with that Congressional action, expressly state that the level of a student's remuneration and the types of services performed are irrelevant to determining whether a student qualifies for the exception. I.R.C. Reg. 31.3121(b)(10)-2(b),(c).

Because nothing in the legislative history states that Congress intended to preclude residents from relying on the student exemption, the district court is reduced to utter speculation. The crux of the court's opinion is its speculation that Congress' silence somehow reflects its intention to prohibit residents from relying on the student FICA exemption:

Finally, the court's speculation ignores the most obvious, logical, and straightforward explanation for Congress' action in 1965; namely, Congress saw fit to repeal the special FICA exemptions which were then available to interns and certain physicians, but Congress elected not to deny residents the benefit of the generally available FICA exemptions -- including the student exemption. That logical and straightforward view is directly supported by the Senate Report, which states that "the effect of this amendment [repealing the "intern exemption"] is to extend coverage under the [FICA] to such interns unless their services are excluded under provisions other than section 3121(b)(13) [the intern exemption]." Ex. 3, p. 1.

Moreover, whatever unstated views members of Congress may have held in 1965 concerning residents' ability to qualify for the student FICA exemption are completely outdated. Since 1965 there have been dramatic changes in graduate medical education programs. As a result, medical residents at teaching hospitals like the DMC unquestionably qualify for the student exception.

In 1965 and prior, hospitals received limited, if any, governmental support for graduate medical education. As a matter of simple economics, some hospitals may have been forced to sacrifice resident education to patient care needs.

After 1965, the United States faced a crisis in training enough qualified young doctors. Congress therefore approved major government funding -- through Medicare and Medicaid -- to support graduate medical education. Congress implemented (i) direct medical education funding ("DME") to support, for example, resident stipends, and (ii) indirect medical education funding ("IME") to support hospitals' indirect increased costs resulting from graduate medical education. Those indirect costs include, for example, "the additional tests and procedures ordered by residents as well as the extra demands placed on other staff as they participate in the educational process." St. Mary's Hospital of Rochester v. Leavitt, 416 F.3d 906, 908, 909 (8^th Cir. 2005).

DME and IME funding has been made available only for "approved graduate medical education" programs, i.e., those meeting the strict educational requirements of the Accreditation Council for Graduate Medical Education (ACGME). 42 C.F.R. § 413.75(c). ACGME program requirements developed post-1965 are a matter of public record and are extraordinarily rigorous in their required educational elements. See www.acgme.org. ACGME defines "graduate medical education" as "the period of didactic and clinical education in a medical specialty which follow the completion of a recognized undergraduate medical education and which prepares physicians for the independent practice of medicine, also referred to as residency education." Id., ACGME Glossary of Terms. ACGME has issued hundreds of pages of rules and regulations concerning such issues as the required number and qualification of faculty, course requirements, support facilities such as medical libraries, research requirements, etc., etc. See, for example, exhibit 4, which is the ACGME's program requirements for vascular surgery, at pages 5 (faculty), 8 (curriculum), 10 (residents scholarly activity), and 14 (evaluation). Other program requirements are available at www.acgme.org. GME programs must provide residents with a complete educational experience -- or else the program loses its accreditation.

The dramatic changes to graduate medical education post-1965 also reflect a 1995 change in Medicare regulations. The "physicians at teaching hospitals" (or "PATH") regulations allow teaching physicians to bill for residents' services in "teaching settings" only if "a teaching physician is present during the key portion of any service or procedure for which payment is sought." 42 C.F.R. § 415.172(a). Gone are the days that a hospital could use residents for "scut work" or to "replace" physicians. Residents now are truly students.⁵

Moreover, the district court's concerns are wildly overblown. The Mayo approach was not the least bit unworkable in that case. The Mayo case, from start to finish, took slightly more than two days to try.

Finally, the vast majority of GME programs are governed by the extraordinarily demanding educational requirements of the ACGME. GME programs must also comply with the 1995 PATH regulations. Those national, standardized procedures mandate strict educational requirements and result in residents qualifying as students. See Apfel, Mayo. If, as DMC believes will happen, other courts agree that the ACGME and PATH requirements result in student status for residents, one would expect the United States to move to resolve these cases in an appropriate fashion.

IV. CONCLUSION

If Congress wanted to preclude medical residents from claiming the benefit of the student FICA exemption, it could have amended the statute to so state. Congress did not amend the statute and the district court certainly had no authority to so so. The district court's decision should be reversed.

² The United States in other FICA cases has argued that its own Chief Counsel's Advice Memorandum should be disregarded because it is not "precedential." In fact, however, the Memorandum is highly relevant here. In Transco Exploration Co. v. Commissioner of Internal Revenue, 949 F.2d 837 (5* Cir. 1992), the Court of Appeals rejected the IRS' interpretation of a statute, relying, in part, on IRS private letter rulings which supported the taxpayer's position. While acknowledging those rulings could not be cited as precedent, the Court held them to be relevant in construing the statute:

⁴ In St Luke's Hospital Association of Cleveland v. United States, 333 F.2d 157 (6th Cir. 1964), the hospital argued that "residents" who were "doctors-in-training" were entitled to the benefit of the intern exemption from FICA tax. The Court rejected the hospital's argument, holding that the exception was clearly limited to "interns" and could not be expanded by the courts to also encompass "residents." The St. Luke's case did not address the student FICA exemption. It is, therefore, completely inapposite to the issue now before the Court.

⁵ Hospital patients typically are billed separately for "facility", i.e. hospital services, and "professional", i.e. physician services. Hospitals do not bill for residents' services. Teaching physicians can bill for residents' services only if they are present during the key portion of the service or procedure.