N.Y. & Presbyterian Hosp. v. United States

• Decision Date: 31 January 2018
• Docket Number: 2017-1180
• Parties: NEW YORK AND PRESBYTERIAN HOSPITAL, Plaintiff-Appellant v. UNITED STATES, Defendant-Appellee
• Court: U.S. Court of Appeals — Federal Circuit

881 F.3d 877

NEW YORK AND PRESBYTERIAN HOSPITAL, Plaintiff-Appellant

v.UNITED STATES, Defendant-Appellee

2017-1180

United States Court of Appeals, Federal Circuit.

Decided: January 31, 2018

Maura Barry Grinalds, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, argued for plaintiff-appellant. Also represented by Jonathan Lerner ; Bernard John Williams, Jr., Washington, DC.

Jacob Earl Christensen, Tax Division, United States Department of Justice, Washington, DC, for defendant-appellee. Also represented by Teresa E. McLaughlin, David A. Hubbert, Washington, DC.

Before Newman, O'Malley, and Wallach, Circuit Judges.

Dissenting opinion filed by Circuit Judge O'MALLEY .

Wallach, Circuit Judge.

Appellant New York and Presbyterian Hospital ("the Hospital")¹ sued Appellee the United States ("the Government") in the U.S. Court of Federal Claims, alleging that Internal Revenue Code § 3102(b) (2012) entitled the Hospital to recover money paid to its medical residents to settle related litigation in the U.S. District Court for the Southern District of New York ("the District Court"). The Government filed a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) of the Rules of the Court of Federal Claims. The Court of Federal Claims granted the Government's Motion to Dismiss, holding that § 3102(b) is not a money-mandating source of substantive law, as required for the Court of Federal Claims to have jurisdiction pursuant to 28 U.S.C. § 1491(a)(1) (2012) ("the Tucker Act"). See N.Y. & Presbyterian Hosp. v. United States , 128 Fed.Cl. 363, 364–65 (2016) ; see also J.A. 1 (Final Judgment).

The Hospital appeals. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3). We reverse and remand.

BACKGROUND ²

I. The Relevant Statutory and Regulatory Framework

Pursuant to the Federal Insurance Contributions Act ("FICA"), I.R.C. §§ 3101 – 3128, employees and employers each pay taxes based on wages paid to employees. See id. §§ 3101 (Tax on Employees), 3111 (Tax on Employers). Generally, the employee's FICA taxes are "collected by the employer of the taxpayer[ ] by deducting the amount of the tax from the wages as and when paid." Id. § 3102(a). The subsection at issue on appeal, § 3102(b), further provides that "[e]very employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer."

There are certain exceptions to the FICA tax. Relevant here, under the student exception, FICA taxes do not apply to wages for "service performed in the employ of ... 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." Id. § 3121(b)(10). Although the Internal Revenue Service ("IRS") determined that "medical residents were not eligible for the student exception and required hospitals employing medical residents to withhold the employee share of FICA taxes from residents' paychecks and pay the withheld amounts and the employer share to the [G]overnment," the scope of the student exception became subject to litigation. N.Y. & Presbyterian Hosp. , 128 Fed.Cl. at 365 (citations omitted). During the pendency of that litigation, the IRS allowed either employers or medical residents to file protective refund claims to preserve their claims for refunds of the FICA taxes. Id. ; see Treas. Reg. § 31.6402(a)-2(a), (b) (1960).

In 2004, the IRS implemented a regulation excluding medical residents from the student exception for services provided after April 1, 2005. N.Y. & Presbyterian Hosp. , 128 Fed.Cl. at 365 ; see Student FICA Exception, 69 Fed. Reg. 76,404, 76,408 –10 (Dec. 21, 2004); see also Mayo Found. for Med. Educ. & Research v. United States , 562 U.S. 44, 60, 131 S.Ct. 704, 178 L.Ed.2d 588 (2011) (holding that the "rule is a reasonable construction of what Congress has said"). However, in 2010, "the IRS decided that ... medical residents could qualify for the student exception for tax periods ending before April 1, 2005," such that "hospitals and [medical] residents who had filed protective refund claims for tax periods before April 1, 2005[,] would be able to obtain refunds of the FICA taxes withheld from residents' wages." N.Y. & Presbyterian Hosp. , 128 Fed.Cl. at 365 (citations omitted); see J.A. 37 (IRS News Release).

II. The District Court Litigation

In August 2013, former medical residents ("the District Court Plaintiffs") sued the Hospital in the District Court, alleging that the Hospital had not filed protective refund claims between January 1995 and June 2001, and asserting claims of fraud, constructive fraud, breach of fiduciary duty, negligent misrepresentation, negligence, breach of contract, and unjust enrichment. See Childers v. N.Y. & Presbyterian Hosp. , 36 F.Supp.3d 292, 298, 300 (S.D.N.Y. 2014) ; see J.A. 38–74. The Hospital filed a motion to dismiss, see J.A. 75–102, arguing that, inter alia, the District Court Plaintiffs' claims were "disguised tax refund suits," Childers , 36 F.Supp.3d at 303, and Internal Revenue Code § 7422"bars any suit to recover a tax unless a timely refund claim has been made," id. at 302 ; see I.R.C. § 7422(a) (providing, in relevant part, that "[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected ... until a claim for refund or credit has been duly filed" with the IRS). The District Court denied the Hospital's Motion to Dismiss, holding that the District Court Plaintiffs' claims "do not arise out of the Hospital's collection of taxes[ ] and therefore do not implicate the rationale for excusing the employer as tax collector from liability for tax refunds" but rather out of "independent actions and omissions" like failing "to file protective refund claims." Childers , 36 F.Supp.3d at 303.

After the District Court declined the Hospital's request to certify its denial of the Hospital's Motion to Dismiss for immediate appeal, see id. at 315, the Hospital petitioned for writs of mandamus, e.g. , J.A. 117, each of which the U.S. Court of Appeals for the Second Circuit denied, J.A. 157. The Hospital decided to pursue settlement and, in November 2015, the Hospital and the District Court Plaintiffs entered into a settlement agreement, whereby the Hospital agreed to pay the District Court Plaintiffs $6,632,000. See J.A. 346, 348; see also J.A. 261. Relevant here, the Settlement Agreement provides that the settlement award "can be appropriately characterized as a refund for the amount of FICA taxes previously withheld by the Hospital." J.A. 275. Upon approving the the Settlement Agreement, the District Court dismissed the District Court Plaintiffs' claims. See J.A. 358.

III. The Court of Federal Claims Litigation

In April 2016, the Hospital filed its Complaint in the Court of Federal Claims,³ arguing that § 3102(b) indemnified the Hospital from the District Court Plaintiffs' claims and seeking, inter alia, reimbursement of the $6,632,000 paid to the District Court Plaintiffs under the Settlement Agreement. J.A. 34–35. The Government filed its Motion to Dismiss, arguing that "the phrase ‘shall be indemnified’ in [§] 3102(b) is not properly read to require the [G]overment to reimburse an employer that is sued in connection with the collection of FICA taxes." N.Y. & Presbyterian Hosp. , 128 Fed.Cl. at 369. The Court of Federal Claims analyzed FICA's statutory framework and agreed with the Government, holding that "[§] 3102(b) is ... an immunity provision and that a contrary reading would undermine the statutory refund scheme contrary to Congress' intent." Id. at 373.

DISCUSSION

I. Standard of Review and Legal Standard

We review the Court of Federal Claims' dismissal of an action for lack of subject matter jurisdiction de novo, Coast Prof'l, Inc. v. United States , 828 F.3d 1349, 1354 (Fed. Cir. 2016), and its attendant factual findings for clear error, see Hymas , 810 F.3d at 1317.

Pursuant to the Tucker Act, the Court of Federal Claims has jurisdiction

to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

28 U.S.C. § 1491(a)(1). The Tucker Act is "only a jurisdictional statute; it does not create any substantive right enforceable against the United States for money damages. ... [T]he Act merely confers jurisdiction upon [the Court of Federal Claims] whenever the substantive right exists." United States v. Testan , 424 U.S. 392, 398, 96 S.Ct. 948, 47 L.Ed.2d 114 (1976) (emphasis added) (citation omitted). Therefore, "a plaintiff must identify a separate source of substantive law that creates the right to money damages. ... [T]hat source must be ‘money-mandating.’ " Fisher v. United States , 402 F.3d 1167, 1172 (Fed. Cir. 2005) (en banc in relevant part) (citations omitted).

Although the waiver of sovereign immunity must be unequivocal, see United States v. White Mountain Apache Tribe , 537 U.S. 465, 472, 123 S.Ct. 1126, 155 L.Ed.2d 40 (2003), the money-mandating source of substantive law may be express or implied, see United States v. Mitchell , 463 U.S. 206, 217 n.16, 103 S.Ct. 2961, 77 L.Ed.2d 580 (1983). In Mitchell , the Supreme Court reaffirmed that a plaintiff "must demonstrate that the source of substantive law ... relie[d] upon can fairly be interpreted as mandating compensation by the Federal Government for the damages sustained." Id. at 216–17, 103 S.Ct. 2961 (emphasis added) (internal quotation marks, citation, and footnote omitted). Subsequently, the Supreme Court clarified the "fairly be interpreted" standard:

This fair interpretation rule demands a showing demonstrably

...