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

• Decision Date: 17 February 2020
• Docket Number: No. 16-cv-00496,16-cv-00496
• Parties: THE NEW YORK AND PRESBYTERIAN HOSPITAL, Plaintiff, v. THE UNITED STATES, Defendant.
• Court: U.S. Claims Court

THE NEW YORK AND PRESBYTERIAN HOSPITAL, Plaintiff, v. THE UNITED STATES, Defendant.

No. 16-cv-00496

United States Court of Federal Claims

February 17, 2020

Boris Bershteyn, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, argued for Plaintiff. With him on the briefs were Maura Barry Grinalds, Jonathan J. Lerner, Mollie Kornreich, New York, NY, and Fred T. Goldberg, Jr., Sylvia O. Tsakos, Washington, D.C.

Matthew D. Lucey, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, D.C. for Defendant. With him on the briefs were Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Tax Division, David I. Pincus, Chief, Court of Federal Claims Section, United States Department of Justice, Washington, D.C.

MEMORANDUM AND ORDER

Pending before the Court are the parties' cross-motions for summary judgment. The Plaintiff, New York and Presbyterian Hospital (Hospital), argues it is entitled to indemnification from the United States pursuant to section 3102(b) of the Internal Revenue Code (I.R.C.). Specifically, the Hospital seeks indemnification for a settlement of claims asserted by former medical residents (Residents) against the Hospital in another case for the amount of Federal Insurance Contributions Act (FICA) taxes the Hospital previously deducted and paid to the United States on the Residents' behalf. See generally The New York and Presbyterian Hospital's Motion for Summary Judgment and Memorandum of Law in Support thereof (ECF No. 49) (Pl. Mot.); The New York and Presbyterian Hospital's Opposition to Defendant's Cross-Motion for Summary Judgment (ECF No. 53) (Pl. Resp.); The New York and Presbyterian Hospital's Reply in Support of Its Motion for Summary Judgment (ECF No. 57) (Pl. Reply). The Hospital argues that indemnification is mandated by the plain language of the statute. The Government contends that the Hospital is not entitled to reimbursement for payment made pursuant to a settlement agreement between the Hospital and its former Residents because the Residents' suit was not a "claim or demand" for a FICA tax refund. See generally Defendant's Cross-Motion for Summary Judgment Brief in Support of Cross-Motion for Summary Judgment (ECF No. 50) (Def. Mot.); Defendant's Opposition to Plaintiff's Cross-Motion for Summary Judgment (ECF No. 52) (Def. Resp.); Defendant's Reply in Support of Defendant's Cross-Motion for Summary Judgment (ECF No. 58) (Def. Reply).

For the reasons stated below, the Court GRANTS Plaintiff's Motion for Summary Judgment and DENIES the Government's Cross-Motion for Summary Judgment.

BACKGROUND

I. Events Leading to the Residents' Suit

The Federal Insurance Contributions Act, I.R.C. §§ 3101-3128 (2012), establishes a tax that is assessed by the Government based on wages paid to workers, and the money collected from the FICA tax is used to fund Social Security and Medicare. See Pl. Mot. Ex. 2F (IRS Publication on Questions and Answers about Medical Resident FICA Refund Claims (Oct. 14, 2010)) at A130.¹ Pursuant to the Act, an employer withholds a percentage of an employee's wages from theemployee's paycheck based on the applicable FICA wage rate. See id. §§ 3101 (Tax on Employees), 3111 (Tax on Employers). The money withheld from the employee's paycheck is then paid to the Government, making it, in essence, a tax paid by the employee. See id. § 3102(a). At the same time, the employer itself pays a FICA "excise tax" that is equal in amount to the percentage wage rate paid by the employee. Id. § 3111(a). In a traditional employer-employee relationship, therefore, the employee pays half of the total FICA tax owed and the employer pays the other half.

However, under section 3121(b)(10), FICA taxes do not apply to "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." I.R.C. § 3121(b)(10) ("the student exception"); Treas. Reg. § 31.3121(b)(10)-2(d). There was a long running controversy as to whether medical residents were eligible for the student exception. During that period, the IRS allowed employers to file "protective" refund claims to preserve claims for a refund of the employer and employee shares of FICA taxes. See Complaint (ECF No. 1) (Compl.) ¶¶ 14-16 (citing Treas. Reg. § 31.6402(a)-2(a)). Medical residents were also free to filetheir own protective refund claims for the employee share of FICA taxes withheld from their pay. Compl. ¶ 14 (citing Treas. Reg. § 31.6402(a)-2(a), (b)).

The Hospital, a not-for-profit organization under section 501(c)(3), and its predecessor by merger, employed medical residents and fellows enrolled in Accreditation Council for Graduate Medical Education at what is now known as the Hospital's Weill Cornell Campus. Pl. Mot. Ex. 1 at A1-2 (¶¶ 2-3); see also Answer (ECF No. 34) ¶ 3.

In 1999, the Hospital and the IRS entered into a Closing Agreement² whereby the Hospital agreed not to file refund claims before June 30, 2001 for any year for FICA taxes paid by and on behalf of the Residents in exchange for settling certain tax issues not relevant here. See Childers v. N.Y. & Presbyterian Hosp., 36 F. Supp. 3d 292, 300 (S.D.N.Y. 2014). The Hospital did not seek or obtain the Residents' consent prior to entering into the Closing Agreement, nor did the Hospital notify the Residents that they could file their own refund claims. Id.

In 2004, the Treasury Department issued a regulation barring medical residents from invoking the student exemption after March 31, 2005. Treas. Reg. § 31.3121(b)(10)-2(d)(3)(i). However, on March 2, 2010, the IRS reversed course and issued guidance stating that hospitals and residents could obtain FICA tax refunds, but only if they had filed protective refund claims for tax periods before April 1, 2005. Pl. Mot. Exs. 2D (I.R.S. News Release IR-2010-25 (Mar. 2, 2010)), 2E (I.R.S. Publication 4843-A (May 2010)), 2F (IRS Publication on Questions and Answers about Medical Resident FICA Refund Claims (Oct. 14, 2010)); see also Answer ¶ 13.

However, in accordance with its Closing Agreement with the IRS, the Hospital did not file protective claims on behalf of the medical residents affiliated with Cornell University.³

II. Residents' Southern District of New York Suit

Upon discovering that they could not receive refunds for the FICA tax that the Hospital had previously withheld, on August 2, 2013, a group of former Cornell Residents (the "Childers Plaintiffs"), brought an action against the Hospital in the United States District Court for the Southern District of New York for: (1) fraud; (2) constructive fraud; (3) breach of fiduciary duty; (4) negligent misrepresentation; (5) negligence; (6) breach of contract; and (7) unjust enrichment. See Pl. Mot. Ex. 2A (Class Action Complaint in Childers v. N.Y. & Presbyterian Hosp., 1:13-cv-05414-LGS (S.D.N.Y. Aug. 2, 2013) (ECF No. 1)) (Childers Compl.) at A69-74 (¶¶ 46-76). On August 21, 2013, another group of former Cornell Residents (the "Simon Plaintiffs") brought the second action against the Hospital for (1) breach of fiduciary duty and (2) unjust enrichment. Id. Ex. 2B (Class Action Complaint in Simon v. N.Y. & Presbyterian Hosp., 1:13-cv- 05899-LGS (S.D.N.Y. Aug. 21, 2013) (ECF No. 1)) (Simon Compl.) at A93-94 (¶¶ 74-82). On October 9, 2013, the two cases were consolidated for pre-trial purposes. Childers, 36 F. Supp. 3d at 301; Pl. Mot. Ex. 2C (Consolidated Am. Complaint, Simon, 1:13-cv-05899-LGS (S.D.N.Y. Oct. 3, 2014) (ECF No. 67)) (Consolidated Am. Compl.). The Residents alleged that the Hospital made the decision not to seek refunds for their residents pursuant to the Hospital's Closing Agreement with the IRS. Consolidated Am. Compl. at A107 (¶ 45). The Residents admitted in their suit that they did not take action to file individual refund claims on their own behalf for the FICA taxes they sought to recover from the Hospital. See Childers Compl. at A60, A63 (¶¶ 7, 21); Simon Compl. at A78-79, A88 (¶¶ 3, 47); Consolidated Am. Compl. at A99 (¶ 6). As relief, the Residents soughtdamages in the amount of the FICA tax withheld by the Hospital for the period at issue. See Pl. Mot. Exs. 2L at A320 (Pls. Initial Disclosures, Childers, 1:13-cv- 5414-LGS (S.D.N.Y. Oct. 31, 2013) (Childers Initial Disclosures)), 2M at A326-28 (Pls. Initial Disclosures, Simon, 1:13-cv-05899-LGS (S.D.N.Y. Oct. 31, 2013) (Simon Initial Disclosures)); see also Pl. Mot. Ex. 2K (Mem. of Law in Support of the United States of America's Mot. to Dismiss, Simon, 1:13-cv-05899- LGS (S.D.N.Y. Jan. 20, 2015), ECF No. 85).

The Hospital moved to dismiss in the district court, arguing that the Residents' suit was a disguised tax refund suit that needed to be filed against the Government pursuant to Internal Revenue Code § 7422. Pl. Mot. Ex. 2R (Hospital's Mem. of Law in Support of its Mot. to Dismiss, Childers, 1:13-cv-05414-LGS (S.D.N.Y. Oct. 31, 2013) (ECF No. 21)) at A385-93. Alternatively, the Hospital argued that Plaintiffs failed to state any cognizable claim (id. at A394-403) and that the Residents' claims were time-barred (id. at A404-06).

The district court denied the motion to dismiss with respect to each of the Residents' claims, aside from the Residents' breach of contract claims. Childers, 36 F. Supp. 3d at 315. Specifically, the court held that section 7422 did not bar the Residents' claims because the Residents' claims did "not arise out of the Hospital's collection of taxes . . . but from later, independent actions and omissions, such as agreeing in the Settlement not to file protective refund claims on behalf of Plaintiffs, keeping the Settlement secret from Plaintiffs, not filing refund claims on behalf of Plaintiffs and not informing Plaintiffs that they should file refund claims for themselves." Childers, 36 F. Supp. 3d at 303. Moreover, the Residents were not seeking to hold the "Hospital liable for...