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

• Decision Date: 19 September 2016
• Docket Number: No. 16-496T,16-496T
• 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. 16-496T

United States Court of Federal Claims

September 19, 2016

Motion to Dismiss for Lack of Jurisdiction; RCFC 12(b)(1); Federal Insurance Contributions Act ("FICA"); Employer Indemnification; 26 U.S.C. § 3102(b)

Maura B. Grinalds, New York, NY, for plaintiff. Jonathan J. Lerner, Michael H. Gruenglas, and Robert L. Dunn, New York, NY, and Fred T. Goldberg, Jr., B. John Williams, and Daniel W.J. Becker, Washington, DC, of counsel.

Matthew D. Lucey, Court of Federal Claims Section, Tax Division, United States Department of Justice, Washington, DC, with whom were Caroline D. Ciraolo, Acting Assistant Attorney General, and David I. Pincus, Chief, Court of Federal Claims Section, for defendant.

OPINION GRANTING MOTION TO DISMISS

FIRESTONE, Senior Judge.

Pending before the court is defendant the United States' ("the government") motion to dismiss this action filed by plaintiff The New York and Presbyterian Hospital ("the hospital"). The hospital filed this action to recover money the hospital paid to medical residents to settle litigation in the United States District Court for the Southern District of New York ("the district court") (S.D.N.Y. Case Nos. 13 Civ. 5414, 13 Civ. 5899). In the district court consolidated action, the hospital was sued by medical residents for fraud, breach of contract, unjust enrichment, and related claims in connection with the hospital's failure to file protective refund claims for the medical residents for Federal Insurance Contributions Act ("FICA") taxes that the hospital and its predecessor had withheld from the medical residents' pay from 1995 to 2001. The hospital asserts in its complaint before this court that it is entitled to payment from the government for the amount it paid the medical residents under section 3102(b) of the Internal Revenue Code ("IRC"), 26 U.S.C. § 3102(b).

Section 3102(b) provides that "[e]very employer required so to deduct the [FICA] 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." The hospital contends that section 3102(b) requires the government to reimburse the hospital for the payments it made to the medical residents as the means of "indemnifying" the hospital for collecting the FICA tax in the first instance. Based on its reading of the statute, the hospital asserts that section 3102(b) is money-mandating and thus this court has jurisdiction under the Tucker Act, 28 U.S.C. § 1491(a).

The government argues that this court does not have jurisdiction to hear the hospital's case on the grounds that section 3102(b) of the IRC is not a money-mandating statute and thus the case must be dismissed under Rule 12(b)(1) of the Rules of the Court of Federal Claims ("RCFC"). According to the government, section 3102(b) is an immunity provision. The government argues that the term "indemnified" in section 3102(b) is properly read to mean that employers are not liable to employees in the event an employee makes a claim against the employer in connection with the employer'swithholding of FICA taxes. The government argues that this reading is compelled by IRC section 7422, which states 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 [Internal Revenue Service ("IRS")] . . . ." IRC § 7422(a). The government argues that by virtue of section 7422, no court has jurisdiction over a claim by an employee for FICA taxes collected erroneously by an employer until the employee taxpayer first files a claim with the IRS and thus no employer can ever face liability for erroneously collecting FICA taxes. The government also relies on a series of cases that have held that section 3102(b) does not provide a private right of action by employees against employers with regard to withholding taxes and thus employers are immune from liability under section 3102(b) from claims by employees. In this connection, the government further argues that the hospital was not sued for erroneously withholding FICA taxes but was instead sued in tort for the hospital's alleged wrongful actions in connection with failing to inform the medical residents of their possible right to a tax refund. The government contends that section 3102(b) cannot be construed as mandating payment by the government for damages paid to settle private tort claims. For all of these reasons, the government argues, section 3102(b) cannot serve as a basis for this court to exercise jurisdiction under the Tucker Act.¹ As discussed below, the courtagrees with the government and thus the government's motion to dismiss under Rule 12(b)(1) is GRANTED.

I. STATUTORY AND FACTUAL BACKGROUND

FICA taxes for Social Security and Medicare are based on wages paid to employees. See IRC §§ 3101, 3111. There is an employee's share and an employer's share. See IRC §§ 3101, 3111. Generally, section 3102(a) requires an employer to deduct an employee's share of FICA taxes from the employee's wages. As noted above, section 3102(b) provides that "[e]very employer required so to deduct the [FICA] 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."

The district court litigation between the hospital and the medical residents has its roots in the so-called student exception to FICA taxation in section 3121(b)(10) of the IRC. Specifically, 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." IRC § 3121(b)(10) ("the student exception"). The IRS took the position that medical residents were not eligible for the student exception and required hospitals employing medical residents to withhold the employee share of FICA taxesfrom residents' paychecks and pay the withheld amounts and the employer share to the government. Compl. ¶ 9; Def.'s Mot. to Dismiss ("MTD") 3.

For a number of years the scope of the student exception was subject to litigation. 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. Compl. ¶¶ 14-16 (citing Treas. Reg. § 31.6402(a)-2(a)). Medical residents were also free to file their 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)).

In 2004, the IRS adopted a regulation that generally excluded medical residents, as full-time employees, from the student exception for services provided after April 1, 2005. Compl. ¶ 12 (citing Treas. Reg. § 31.3121(b)(10)-2(d)(3); Student FICA Exception, 69 Fed. Reg. 8,604 (Feb. 25, 2004) (proposed rule)); see also Student FICA Exception, 69 Fed. Reg. 76,404 (Dec. 21, 2004) (final rule).²

On March 2, 2010, however, the IRS decided that while the issue of their student status was being debated, medical residents could qualify for the student exception for tax periods ending before April 1, 2005. Thus, hospitals and 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. Compl. ¶ 13 (citing IRS to Honor Medical Resident FICA Refund Claims, I.R.S. News Release IR-2010-25 (Mar. 2,2010)); Def.'s MTD 5 (citing United States v. Mount Sinai Med. Ctr. of Florida, Inc., 486 F.3d 1248 (11th Cir. 2007); Childers v. New York & Presbyterian Hosp., 36 F. Supp. 3d 292, 299 (S.D.N.Y. 2014)), Ex. 1 (copy of IRS's 2010 news release). The underlying dispute in this case stems from the hospital's decision not to file protective refund claims for some of the medical residents working at the hospital. Specifically, the hospital did not file protective refund claims for the medical residents affiliated with Cornell University. Apparently, the hospital did file protective refund claims for medical residents at the hospital who were affiliated with Columbia University. Def.'s MTD 5; Childers, 36 F. Supp. 3d at 300.

The medical residents from Cornell University filed suits against the hospital in August 2013. Compl. ¶ 20. The cases were consolidated. The residents alleged that from January 1, 1995 through June 30, 2001, pursuant to a confidential agreement between the hospital and the IRS that resolved an unrelated and undisclosed tax matter, the hospital agreed not to file protective refund claims for the medical residents' share of FICA taxes withheld from their pay or notify them to file their own protective refund claims. Childers, 36 F. Supp. 3d at 300. The medical residents charged in their complaints that the hospital's decision not to file protective refund claims on their behalf amounted to fraud, constructive fraud, breach of fiduciary duty, negligent misrepresentation, negligence, breach of contract, and unjust enrichment. Id. at 298, 301; see also Def.'s MTD 5-6, Exs. 2-3, 8.

The hospital moved to dismiss the district court litigation on the grounds that the residents were, in effect, seeking a refund of the FICA taxes the hospital had withheldfrom the residents' wages and that under IRC section 7422 the residents had to first file refund claims with the IRS. See Childers, 36 F. Supp. 3d at 303. Section 7422 states 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...