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Government Seeks Review of Decision on FICA Taxes Paid for Medical Residents

FEB. 1, 2007

University of Chicago Hospitals v. United States

DATED FEB. 1, 2007
DOCUMENT ATTRIBUTES
  • Case Name
    UNIVERSITY OF CHICAGO HOSPITALS, Plaintiff-Appellee v. UNITED STATES OF AMERICA, Defendant-Appellant
  • Court
    United States Court of Appeals for the Seventh Circuit
  • Docket
    No.
  • Institutional Authors
    U.S. Department of Justice
  • Cross-Reference
    For the district court opinion in University of Chicago Hospitals

    v. United States, No. 1:05-cv-05120 (N.D. Ill. Sep. 8, 2006), see

    Doc 2006-19211 [PDF] or 2006 TNT 179-15 2006 TNT 179-15: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Health care
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2007-4994
  • Tax Analysts Electronic Citation
    2007 TNT 40-21

University of Chicago Hospitals v. United States

 

IN THE UNITED STATES COURT OF APPEALS

 

FOR THE SEVENTH CIRCUIT

 

 

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)

 

 

PETITION FOR PERMISSION TO APPEAL

 

PURSUANT TO 28 U.S.C. § 1292(b)

 

 

Eileen J. O'Connor

 

Assistant Attorney General

 

 

Richard T. Morrison

 

Deputy Assistant Attorney General

 

 

Gilbert S. Rothenberg (202) 514-3361

 

Teresa E. McLaughlin (202) 514-4342

 

Michelle B. Smalling (202) 353-8599

 

Attorneys

 

Tax Division

 

Department of Justice

 

Post Office Box 502

 

Washington, D.C. 20044

 

 

Of Counsel:

 

Patrick J. Fitzgerald

 

United States Attorney

 

 

                           TABLE OF CONTENTS

 

 

 Question presented

 

 Statement why interlocutory appeal is appropriate

 

 Statement of facts

 

 

      A. Taxpayer and its residency programs

 

      B. Taxpayer's returns and refund claims

 

      C. The proceedings in the District Court

 

 

           1. The parties' contentions

 

           2. The District Court's opinion

 

 

 Discussion

 

 

      A. The nature of the dispute

 

 

      B. The criteria for permissive interlocutory appeal under 28

 

      U.S.C. § 1292(b) are met, and this Court should exercise its

 

      discretion to permit an immediate appeal

 

 

           1. The question presented is a "question of law"

 

 

           2. The question is a "controlling" one

 

 

           3. There is "a substantial ground for difference of

 

           opinion"

 

 

           4. Allowing an immediate appeal may "materially advance

 

           the ultimate termination of the litigation"

 

 

 Conclusion

 

 Certificate of service

 

 Addendum

 

 

                      TABLE OF AUTHORITIES

 

 

 CASES

 

 

 Ahrenholz v. Board of Trustees of Univ. of Il., 219 F.3d 674

 

 (7th Cir. 2000)

 

 

 Albany Med. Ctr. v. United States, 1:04-C 2007 WL. 119415

 

 (N.D.N.Y. Jan. 10, 2007)

 

 

 Center for Family Med. v. United States, 456 F. Supp. 2d 1115

 

 (D.S.D. 2006)

 

 

 Johnson v. Burken, 930 F.2d 1202 (7th Cir. 1991)

 

 

 Johnson City Med. Ctr. v. United States, 999 F.2d 973 (6th

 

 Cir. 1993)

 

 

 Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21 (2d Cir.

 

 1990)

 

 

 McCarthy v. Bronson, 500 U.S. 136 (1991)

 

 

 Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998)

 

 

 Sokaogon Gaming Enter. v. Tushie-Montgomery Assoc., Inc., 86

 

 F.3d 656 (7th Cir. 1996)

 

 

 St. Luke's Hosp. Assoc. v. United States, 333 F.2d 157 (6th

 

 Cir. 1964)

 

 

 United States v. Detroit Med. Ctr., 98 A.F.T.R.2d (RIA) 7995

 

 (E.D. Mich. 2006)

 

 

 United States v. Mayo Found. for Med. Educ. and Research, 282

 

 F. Supp. 2d 997 (D. Minn. 2003)

 

 

 United States v. Mt. Sinai Med. Ctr. of Fla., 353 F. Supp. 2d

 

 1217 (S.D. Fla. 2005), appeal docketed, No. 06-11693-GG (11th

 

 Cir. Mar. 15, 2006)

 

 

 United States v. University Hosp., Inc., 98 A.F.T.R.2d (RIA)

 

 5635 (S.D. 2006)

 

 

 STATUTES AND REGULATIONS:

 

 

 Internal Revenue Code (26 U.S.C.)

 

 

      § 403(b)

 

      § 480

 

      § 481

 

      § 1426(b)(13)

 

      § 3101

 

      § 3102

 

      § 3111

 

      § 3121(a)

 

      § 3121(b)(10)

 

 

 28 U.S.C. § 1292(b)

 

 

      Treas. Reg.:

 

 

           § 31.3121(b)(10)-2(b)

 

           § 31.3121(b)(10)-2(c)

 

 

 MISCELLANEOUS:

 

 

 Black's Law Dictionary (8th ed. West 2004)

 

 

 Fed. R. App. P. 5

 

 

 H.R. Rep. No. 76-728 (1939)

 

 

 H.R. Rep. No. 81-1300 (1950)

 

 

 H.R. Rep. 89-213 (1965)

 

 

 S. Rep. No. 81-1669 (1950)

 

 

 Social Security Act Amendments of 1939, ch. 666, § 1426(a) & (b),

 

 53 Stat. 1360

 

 

 Social Security Act Amendments of 1950, Pub. L. No. 81-734, §

 

 204(a), 64 Stat. 477

 

 

 Social Security Act Amendments of 1965, Pub. L. No. 89-97, § 311,

 

 79 Stat. 286

 

* * * * *

 

 

PETITION FOR PERMISSION TO APPEAL

 

PURSUANT TO 28 U.S.C. § 1292(b)

 

 

The United States, by its undersigned attorneys, respectfully petitions this Court, pursuant to 28 U.S.C. § 1292(b) and Fed. R. App. P. 5, for permission to appeal from the opinion and order of the United States District Court for the Northern District of Illinois (District Court) (Judge Matthew F. Kennelly) filed on September 8, 2006, denying the Government's motion for summary judgment. (A.1- 8.)1 The court rejected the Government's contention that medical residents are categorically ineligible for the "student" exemption from Federal Insurance Contribution Act (FICA) coverage under § 3121(b)(10) of the Internal Revenue Code of 1986 (26 U.S.C.) (the Code or I.R.C.).2 On January 30, 2007, Judge Kennelly determined that the requirements for a discretionary interlocutory appeal under 28 U.S.C. § 1292(b) were satisfied, and he accordingly certified the order. (A.9-10.)

 

QUESTION PRESENTED

 

 

Whether medical residents are ineligible for the "student" exception to FICA tax coverage under I.R.C. § 3121(b)(10) as a matter of law.

 

STATEMENT WHY INTERLOCUTORY APPEAL IS APPROPRIATE

 

 

The question presented is one of first impression in this Circuit and is of great administrative importance. The same question is the subject of 16 other lawsuits and is implicated in more than 2,000 claims for refund currently pending before the IRS in which taxpayers are seeking to recover more than $3.6 billion paid with respect to the years 1995 through 2002. Taxpayers are expected to file an additional $1.4 billion in refund claims with respect to the years 2003 through 2005. Interest on pending and projected refund claims (if allowed) is projected to reach between $2 and $3 billion.

In addition, requiring the Commissioner to litigate individually the merits of each refund suit poses a substantial administrative burden. Trying each suit on the merits will force the Commissioner to engage in highly fact-intensive and time-consuming discovery -- discovery which the Government contends is unnecessary since, in its view, medical residents are subject to FICA tax as a matter of law. Indeed, discovery is expected to last over a year in this case alone. (See Doc. 44.) Unless an interlocutory appeal is permitted, the Commissioner will be forced to expend substantial time and resources defending the merits of this lawsuit, which itself concerns a significant amount of taxes. Under these circumstances, an appeal after trial has been completed will be an inadequate remedy, because it cannot undo the substantial costs that the Commissioner will have to incur to obtain a final decision.

 

STATEMENT OF FACTS

 

 

A. Taxpayer and its residency programs

The University of Chicago Hospitals (taxpayer) is a not-for- profit Illinois corporation. (Doc. 1 at 1.) 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. (Doc. 23 at 1-2 & Ex. 3.) Taxpayer also had affiliation agreements with several other local hospitals. Taxpayer's stated mission "is to provide superior health care in a compassionate manner, ever mindful of each patient's dignity and individuality." (Doc. 23 at 2 & Exs. 3 at 5, 4 at 2.)

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. (Doc. 23 at 2 & Ex. 8.)

After accepting an appointment, a resident signs a contract between himself and taxpayer. Under the terms of the contract, the resident is required to provide patient care services at one of taxpayer's hospitals. The hospital reserves the right to terminate the resident at any time for grounds specified in the contract. (Doc. 23 at 3 & Ex. 9.) 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. (Id.; Doc. 23, Ex. 8.) For example, for the employment year running from July 1, 2005 to June 30, 2006, a PGY-1 (first-year resident or intern) was paid $41,300, while a PGY-7 (seventh-year resident) was paid $52,000. (Doc. 23 at 3 & Ex. 3.)

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). (Doc. 23 at 2-3 & Ex. 9.)

B. Taxpayer's returns and refund claims

Taxpayer initially reported the stipends it paid to its residents as "wages" on Forms 941, Employer's Quarterly Federal Tax Return, for all taxable quarters of 1995 and 1996, paying the employer's share and withholding the employee's share of FICA taxes thereon. (Doc. 1 at 2.) Taxpayer later filed claims for refund on behalf of itself and virtually all of its residents (from whom it had obtained the requisite consent to do so), seeking tax refunds of $2,757,915 for 1995 and $2,814,789 for 1996, plus interest. (Doc. 1 at 4-6.) Taxpayer contended that the residents' stipends were not includable in the wage base because their services fell within the so-called "student" exception to FICA coverage found in § 3121(b)(10), which excepts from the scope of "employment" services rendered by a student to a school, college or university (or a supporting organization), if the student is enrolled in and regularly taking classes at such school, college or university. (Doc. 1 at 3 & Exs. A-E.) After more than six months elapsed without action being taken on those refund claims (Doc. 1 at 3), taxpayer brought this suit for refund.

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 that excluded residents from its scope. 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. 89-213 at 95 (1965)), Congress repealed the intern exception, as well as an exemption 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 intermittently, unlike medical residents. (Id. at 9-10, citing H.R. Rep. No. 76-728 at 18 (1939).) The Government contended that it would obviously be contrary to congressional intent to conclude that residents are eligible for the student exception. (Id. at 17-18.)

Taxpayer argued that medical residents are indeed eligible to invoke 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 in which 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. In addressing the Government's motion, the court stated that "[t]he question presented here is primarily one of law: whether UCH is categorically barred from invoking the student exception with regard to wages paid to its medical residents." (A.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 the court looked to the pertinent Treasury Regulation for guidance. (Id. at 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." (A.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." (A.7.)

In reaching its conclusion, the District Court declined to follow the decision in United States v. Mt. Sinai Med. Ctr. of Fla., 353 F. Supp. 2d 1217, 1222 (S.D. Fla. 2005), appeal docketed, No. 06-11693-GG (11th Cir. Mar. 15, 2006), where the court concluded, based on the historical context and the legislative history of the student and intern exceptions, that medical residents are ineligible for the student exception as a matter of law. (A.8.) Rather, the District Court agreed with "the Eighth Circuit Court of Appeals, which analyzed a parallel Social Security regulation and found that it required a case-by-case approach to determining whether particular services qualified for the student exception. Ibid., citing Minnesota v. Apfel, 151 F.3d 742, 747-748 (8th Cir. 1998) and United States v. Mayo Found. for Med. Educ. & Research, 292 F. Supp. 2d 997, 1010-1018 (D. Minn. 2003).

Upon motion by the Government (Doc. 45), the District Court later certified its order for interlocutory appeal (A.9-10).

 

DISCUSSION

 

 

A. The nature of the dispute

1. The merits of this FICA tax case involve the coverage of medical school graduates treating patients at taxpayer's hospitals while participating in residency and fellowship programs. The dispute centers upon the proper construction and interrelationship of a number of statutory provisions, evolving through the years, that have governed whether services performed by students, as opposed to interns, residents and self-employed doctors, constitute covered employment. In order to interpret the student exception in the context of "'the language and design of the statute as a whole,'" McCarthy v. Bronson, 500 U.S. 136, 139 (1991) (citation omitted), we briefly set forth its origin, context and development.

Section 3101 imposes taxes supporting the Social Security and Medicare programs on the "wages" of an employee, which are collected at the source and remitted to the Government by the employer under § 3102. Section 3111 in turn imposes an excise tax on employers, likewise with respect to "wages" paid. The term "wages" is 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," also with certain stated exceptions.

Taxpayer here invokes the so-called "student" exception to "employment" found in § 3121(b)(10). That statute provides, in relevant part, that the term "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 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 for students performing services for non-tax exempt entities of this nature. In the latter case, the exemption applied only if the remuneration did not exceed $45 per quarter. Id., § 606(a) & (b), 53 Stat. at 1385 (codified, as amended, at I.R.C. § 1426(a) & (b) (1939 Code)). At the same time, Congress enacted a separate exception for service performed "as a student nurse in the employ of a hospital or a nurses' training school who is enrolled and is regularly attending classes" in a nurses' training school, as well as for service performed "as an interne in the employ of a hospital by an individual who has completed a four years' course in a medical school." Id., § 606(b)(13), 53 Stat. at 1385 (codified at I.R.C. § 1426(b)(13) (1939 Code)).3

The legislative history of the 1939 Amendments indicates that the student and intern exceptions were intended to be narrow, de minimis exceptions to coverage. The House report indicates that Congress intended to limit the student and intern exceptions to circumstances involving "nominal" wages earned for "part-time" or "intermittent work." H.R. Rep. No. 76- 728 at 18 (1939). The report further notes that since 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 added). In describing the intern exception, the House Report makes 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, supra at 49 (emphasis added).

In 1950, Congress removed the wage cap that had previously applied to the exception for students who worked for a non-tax-exempt school, college or university. At the same time, it consolidated the two student exceptions into a single one. Social Security Act Amendments of 1950, Pub. L. No. 81-734, § 204(a), 64 Stat. 477, 531 (the 1950 Amendments). Congress also extended coverage to most self-employed individuals, but not to certain professionals such as lawyers and physicians. Id., § 208(a), 64 Stat. at 540-543 (codified at I.R.C. §§ 480 and 481 (1939 Code)).

Significantly, in consolidating the two student exceptions and removing the wage cap that had previously applied to services performed for taxable schools, Congress clarified that it intended the student and intern exceptions to continue to be limited in scope and applicable only to de minimis situations. The House and Senate reports note that the exemptions "would continue" to be limited to circumstances where the eligible worker earns only "nominal amounts." H.R. Rep. No. 81-1300 at 12-13 (1950); S. Rep. No. 81-1669 at 15 (1950).

Against this background, the Sixth Circuit in St. Luke's Hospital, 333 F.2d 157, denied a hospital's request to have the intern exception construed as applying to residents. The hospital sought a refund of taxes paid on wages paid to residents in their second and subsequent years of hospital training, contending that, unlike the situation that existed in 1939, there was no longer any substantive difference between interns and residents. The Sixth Circuit rejected the hospital's contention. Id. at 163-164. The court did not dispute that, in 1939, a distinction had existed between residents and interns, since some medical schools had then required a year of hospital training as a prerequisite to a degree. Id. at 160-162. Indeed, the court noted that, when it created the exception, Congress had expressly distinguished interns from residents. The court found it significant, however, that Congress had singled out only interns, as opposed to "resident doctor[s]," for the exemption. Id. at 163 (citations omitted). The court also acknowledged the anomaly of covering doctors only during their residencies, since interns and self-employed doctors were still exempt. Id. at 164. The court nevertheless 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 a function of legislation and not that of judicial interpretation." Ibid.

Finally, in 1965, a year after the Sixth Circuit handed down its decision in St. Luke's Hospital, Congress expanded the Social Security coverage of doctors by repealing the intern exception, as well as the exemption that had applied to self-employed physicians. Social Security Act Amendments of 1965, Pub. L. No. 89-97, § 311, 79 Stat. 286, 380-381 (the 1965 Amendments). Congress repealed the intern exception out of concern that many "young doctors" lacked the disability and survivorship protection of Social Security and the wherewithal otherwise to obtain such protection. H.R. Rep. No. 89-213 at 95 (1965). In repealing the exemption for self-employed doctors, Congress noted that they were "the only group of significant size" whose self-employment income was exempted, which "runs counter to the general view that coverage should be as universal as possible." Ibid.

2. In this case, the Government sought summary judgment, advocating a bright-line rule holding that medical residents are ineligible for the student exception as a matter of law. In rejecting that approach, the District Court failed to come to grips with fundamental principles of statutory construction. To begin with, a construction that treats residents as students is not the most natural reading of the statute. Residents, who are graduates of medical school, are scarcely "students" in the ordinary, everyday sense of the word, nor are hospitals "schools, colleges or universities" as those words are most commonly understood.

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 former intern exception not only co-existed with the student exception, but was enacted at the same time, the obvious inference is that Congress went to the trouble of expressly excepting interns from coverage because it understood that the more general student exception did not already cover them. Put another way, if the student exception covered not only students in medical school, but also medical residents, then it would also have covered interns. And, if had that been true, the intern exception would have been surplusage from its inception.

Significantly, after the Sixth Circuit held in St. Luke's Hospital that residents were ineligible for the intern exception, Congress did not override that decision. Instead, it repealed the exemption entirely, as well as the one for self-employed doctors, thereby expanding the coverage of doctors to include the stages of their careers both before and after the second and third years of residency. 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 is that neither residents nor interns were ever intended to be eligible for the student exception.

In any event, the statute is, as the District Court expressly observed (A.4) ambiguous to some extent. This ambiguity warranted consultation of evidence of legislative intent besides the words enacted by Congress over time, which makes it pellucid that Congress intended 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 (Doc. 23 at 3 & Ex. 8)) 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, supra at 18. Although it lifted the wage cap that had applied to services performed for taxable schools, Congress still considered the exemption to be limited to "service performed for nominal amounts." H.R. Rep. No. 81-1300, supra at 12-13; see S. Rep. No. 81-1669, supra at 15.

Although, as the District Court observed (A.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 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), 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 777 (8th ed. West 2004). Reading the provisions of the regulation together, it makes sense to treat the reference to the "immateriality" of compensation as being intended simply to effectuate the repeal of the limitation that had applied only to students employed by schools that did not enjoy tax exemptions, without disturbing the overarching legislative intent that the student exception continue to apply only to employment that is nominal -- or "incident to" -- the course of study.

B. The criteria for permissive interlocutory appeal under 28 U.S.C. § 1292(b) are met, and this Court should exercise its discretion to permit an immediate appeal

Under 28 U.S.C. § 1292(b), if a district judge certifies that an interlocutory order "involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation," upon application to the Court of Appeals within 10 days after entry of the certification, that court may, in its discretion, permit an interlocutory appeal to be taken. As this Court has explained, "[t]here are four statutory criteria for the grant of a section 1292(b) petition to guide the district court: there must be a question of law, it must be controlling, it must be contestable, and its resolution must promise to speed up the litigation." Ahrenholz v. Board of Trustees of Univ. of Il., 219 F.3d 674, 675 (7th Cir. 2000). As we explain below, the courts that have considered the issue presented have reached different conclusions, and lengthy trial proceedings will be avoided if this issue is resolved in favor of the Government. As a result, the benefit to be derived from an immediate appeal is apparent.

 

1. The question presented is a "question of law"

 

In considering whether the denial of summary judgment presents a "question of law," this Court considers whether it "has reference to the meaning of a statutory or constitutional provision, regulation, or common law doctrine, rather than whether the party opposing the summary judgment has raised a genuine issue of material fact." Ahrenholz, 219 F.3d at 676 (citations omitted). The term "question of law" is used "in much the same way a lay person might, as referring to a 'pure' question of law rather than merely to an issue that might be free from factual contest." Id. at 676-677. It is used to refer to "something the court of appeals could decide quickly and cleanly without having to study the record * * * ." Id. at 677. Whether medical residents may invoke the student exception is purely a matter of statutory construction, and no facts are in dispute that bear upon that question.

 

2. The question is a "controlling" one

 

This Court has explained that a question of law "may be deemed 'controlling' if its resolution is quite likely to affect the further course of the litigation, even though it is not certain to do so." Sokaogon Gaming Enter. v. Tushie-Montgomery Assoc., Inc., 86 F.3d 656, 659 (7th Cir. 1996); see also Johnson v. Burken, 930 F.2d 1202, 1206 (7th Cir. 1991). And "[a]lthough the resolution of an action need not necessarily terminate an action in order to be 'controlling,' * * * it is clear that a question of law is 'controlling' if reversal of the district court's order would terminate the action." Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21, 24 (2d Cir. 1990) (citations omitted). This requirement, too, is satisfied. If this Court were to adopt a bright- line test holding medical residents categorically ineligible for the student exception, that dispositive holding would terminate the entire suit for refund.

 

3. There is "a substantial ground for difference of opinion"

 

The issue whether a medical resident is per se ineligible to invoke the student exception is one of first impression in this Circuit. Moreover, the law is unsettled among those courts that have had occasion to consider that issue. For example, in St. Luke's Hospital, the Sixth Circuit held that medical residents beyond the first year of hospital training did not qualify for the intern exception. 333 F.2d at 160-164. It would follow from that decision, as well as the subsequent repeal of the intern exception, that all medical residents are now covered by FICA. The court in Mt. Sinai agreed with St. Luke's, and it also declined to give the student exception a construction that would have rendered the intern exception superfluous. The court in Mt. Sinai explicitly adopted a bright-line rule holding medical residents categorically ineligible for the student exception, 353 F. Supp. 2d at 1224-1230, as, recently, did the courts in Albany Med. Ctr. v. United States, 1:04-CV-1399, 2007 WL 119415 (N.D.N.Y. Jan. 10, 2007), and United States v. Detroit Med. Ctr., 98 A.F.T.R.2d (RIA) 7995 (E.D. Mich. 2006) (following St. Luke's and Mt. Sinai). Cf. Johnson City Med. Ctr. v. United States, 999 F.2d 973, 975 (6th Cir. 1993) (student nurses not given academic credit for their training were ineligible for analogous student-nurse exception). Other courts, like the District Court below, have held that medical residents' eligibility for the student exception should be determined on a case-by-case basis. See, e.g., Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998) (concluding, in dictum, that eligibility of medical residents for exemption as "students" should be determined on a case-by-case basis); see also Center for Family Med. v. United States, 456 F. Supp. 2d 1115 (D.S.D. 2006); United States v. University Hosp., Inc., 98 A.F.T.R.2d (RIA) 5635 (S.D. 2006) (motion for reconsideration pending); United States v. Mayo Found. for Med. Educ. and Research, 282 F. Supp. 2d 997 (D. Minn. 2003). A substantial ground for difference of opinion therefore exists.

 

4. Allowing an immediate appeal may "materially advance the ultimate termination of the litigation"

 

Finally, allowing the Government to take an immediate appeal may "materially advance the ultimate termination of the litigation." If the Government prevails, there will be no need for further proceedings on the remaining issues.4 Such a ruling would obviate exhaustive discovery regarding the nature of the residency and fellowship programs and the residents' performance of patient care services in connection with those programs. This discovery, which the parties have just started to conduct, is currently expected to last until at least February, 2008. (Doc. 44.) Nor, by the same token, would there be any need for a lengthy trial. As a result, a permissive appeal at this juncture would likely "head off protracted, costly litigation." Ahrenholz, 219 F.3d at 677.

 

CONCLUSION

 

 

The Government respectfully requests this Court to exercise its discretion under 28 U.S.C. § 1292(b) to permit an interlocutory appeal.
Respectfully submitted,

 

 

Eileen J. O'Connor

 

Assistant Attorney General

 

 

Richard T. Morrison

 

Deputy Assistant Attorney General

 

 

Gilbert S. Rothenberg

 

(202) 514-3361

 

Teresa E. McLaughlin

 

(202) 514-4342

 

Michelle B. Smalling

 

(202) 353-8599

 

Attorneys

 

Tax Division

 

Department of Justice

 

Post Office Box 502

 

Washington, D.C. 20044:

 

 

Of Counsel:

 

 

Patrick J. Fitzgerald

 

United States Attorney

 

FEBRUARY 2007

 

CERTIFICATE OF SERVICE

 

 

It is hereby certified (i) that on this 1st day of February, 2007, this petition was sent to the Clerk of the Court by FedEx and (ii) that service of this petition was made on counsel for the plaintiff, University of Chicago Hospitals, by sending two copies to them by FedEx, properly addressed as follows:

 

Thomas D. Sykes, Esquire

 

David Joseph Duez, Esquire

 

Elizabeth M. Mills, Esquire

 

McDermott, Will & Emery LLP

 

227 West Monroe Street

 

Suite 4400

 

Chicago, IL 60606-5096

 

Michelle B. Smalling

 

Attorney

 

FOOTNOTES

 

 

1 "A." references are to the Addendum, infra. "Doc." references are to the documents in the original record, as numbered by the Clerk of the District Court.

2 Unless otherwise indicated, all statutory references are to the Code, as amended and in effect with respect to the time in question.

3 Prior to 1950, some medical schools required candidates to complete a one-year internship at a hospital as a prerequisite to the award of an M.D. degree. See St. Luke's Hosp. Assoc. v. United States, 333 F.2d at 160.

4 Those issues would be (i) whether, even if, after discovery, residents may invoke the student exception, a material issue of fact remains for trial; (ii) whether residents' services are "incident to and for the purpose of pursuing a course of study" within the meaning of Treas. Reg. § 31.3121(b)(10)- 2(c); and (iii) whether taxpayer or its hospitals (depending upon which is considered the employing entity) is a "school, college, or university," and, if not, then (iv) whether the employer meets the requirements of § 3121(b)(10)(B) that relate to supporting organizations.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    UNIVERSITY OF CHICAGO HOSPITALS, Plaintiff-Appellee v. UNITED STATES OF AMERICA, Defendant-Appellant
  • Court
    United States Court of Appeals for the Seventh Circuit
  • Docket
    No.
  • Institutional Authors
    U.S. Department of Justice
  • Cross-Reference
    For the district court opinion in University of Chicago Hospitals

    v. United States, No. 1:05-cv-05120 (N.D. Ill. Sep. 8, 2006), see

    Doc 2006-19211 [PDF] or 2006 TNT 179-15 2006 TNT 179-15: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Health care
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2007-4994
  • Tax Analysts Electronic Citation
    2007 TNT 40-21
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