U.S. v. Memorial Sloan-Kettering Cancer Center, Docket No. 07-0926-cv(L).

• Decision Date: 25 March 2009
• Docket Number: Docket No. 07-0949-cv(Con).,Docket No. 07-0926-cv(L).
• Citation: 563 F.3d 19
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. MEMORIAL SLOAN-KETTERING CANCER CENTER, Defendant-Appellant. Albany Medical Center, Plaintiff-Appellant, v. United States of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

563 F.3d 19

UNITED STATES of America, Plaintiff-Appellee, v. MEMORIAL SLOAN-KETTERING CANCER CENTER, Defendant-Appellant.

Albany Medical Center, Plaintiff-Appellant, v. United States of America, Defendant-Appellee.

Docket No. 07-0926-cv(L).

Docket No. 07-0949-cv(Con).

United States Court of Appeals, Second Circuit.

Argued: July 8, 2008.

Decided: March 25, 2009.

Mark H. Churchill, McDermott Will & Emery LLP, Washington, DC (Joel E. Cohen, McDermott Will & Emery LLP, New York, NY, Christopher Kliefoth, Sarah E. Hancur, McDermott Will & Emery LLP, Washington, DC, on the brief), for Plaintiff-Appellant Albany Medical Center.

Mark H. Churchill, McDermott Will & Emery LLP, Washington, DC (Christopher Kliefoth, Teresa M. Goody, McDermott Will & Emery LLP, Washington, DC, Joel E. Cohen, McDermott Will & Emery LLP, New York, NY, on the brief), for

Defendant-Appellant Memorial Sloan-Kettering Cancer Center.

Teresa E. McLaughlin, Attorney, Tax Division, Department of Justice, Washington, DC (Richard T. Morrison, Acting Assistant Attorney General, Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, Michelle B. Smalling, Attorney, Tax Division, Department of Justice, Washington, DC, on the brief, Glenn T. Suddaby, United States Attorney for the Northern District of New York, of counsel), for Defendant-Appellee United States of America.

Ross E. Morrison, Assistant United States Attorney (David S. Jones, Assistant United States Attorney, on the brief), for Michael J. Garcia, United States Attorney for the Southern District of New York, New York, NY, for Plaintiff-Appellee United States of America.

Before: POOLER, HALL, Circuit Judges, and TRAGER, District Judge.^*

Judge TRAGER dissents in a separate opinion.

HALL, Circuit Judge:

These two cases, Albany Medical Center v. United States ("AMC"), No. 1:04-CV-1399, 2007 WL 119415 (N.D.N.Y. Jan. 10, 1997) (Scullin, J.) and United States v. Memorial Sloan-Kettering Cancer Center ("Sloan-Kettering") (Hellerstein, J.), decided respectively by the United States District Courts for the Northern and Southern Districts of New York, both raise the question of whether post-graduate medical residents can invoke the Federal Insurance Contributions Act ("FICA") tax exemption for "students." In each case, the district court ruled that, as a matter of law, post-graduate medical residency programs are not "schools" and medical residents are not "students." Sloan-Kettering raises the further question of whether the monies that the Cancer Center pays to its residents are "scholarships" and therefore exempt from FICA taxes. The district court answered "no" to that question.

We hold that both district courts erred in ruling as a matter of law that medical residents are categorically ineligible for the FICA tax exemption for students. We affirm the District Court for the Southern District of New York, however, insofar as it determined that the monies paid by the Cancer Center to medical residents are not scholarships. We remand both cases to their respective district courts for further proceedings consistent with this opinion.

BACKGROUND¹

I. Overview of Post-Graduate Medical Residency Programs

After completing medical school and receiving a doctor of medicine ("M.D.") degree, prospective physicians commence the graduate phase of their medical education. Generally, graduate medical education consists of a residency or fellowship. Most states, including the State of New York, require physicians to complete a residency program of at least one year before becoming eligible for a medical license. Residency programs typically last between three and five years.

These residency programs are accredited by organizations such as the Accreditation Council for Graduate Medical Education ("ACGME"). The ACGME requires residency programs to be organized educational programs that combine a didactic curriculum with direct exposure to patient care under the supervision of attending physicians. Accordingly, these programs include classroom lectures, daily rounds with an attending physician, Grand Rounds in which experts present research, morbidity and mortality conferences, and reading assignments. Residents are tested and evaluated at times, and those residents who have not mastered necessary skills are given remedial instruction or required to repeat the program. Both Memorial Sloan-Kettering Cancer Center ("the Cancer Center") and the Albany Medical Center ("AMC") (collectively, "the Hospitals") claim that residents participate in patient care only as a way of learning how to care for patients; that any benefit to the hospitals resulting therefrom is entirely incidental; that the hospitals do not meet staffing needs through their residents; and that the hospitals cannot bill for care provided by a resident.

Residents receive funds from the hospital. The Hospitals characterize these monies as "a scholarship or fellowship to aid in the pursuit of their graduate medical education" or as a "stipend." The Government characterizes these monies as compensation for the provision of services. The Hospitals point out that the ACGME requires, as a condition of accreditation, that the Hospitals provide residents with the financial support needed to ensure the residents' participation in the residency programs.

Although we refer to the Cancer Center and AMC as "the Hospitals," the precise institutional arrangements are slightly more complicated than that term would suggest. The Albany Medical Center is a private corporation that administratively links the Albany Medical College with the Albany Medical Center Hospital. Graduate medical programs, including the residency program, are under the primary control of the College, but AMC and the Albany Medical Center Hospital also participate in the program. College faculty supervise and train the residents, and the residency program is directed by the College's Associate Dean for Graduate Medical Education. Memorial Sloan-Kettering Cancer Center is comprised of three entities: Memorial Hospital for Cancer and Diseases ("Memorial Hospital"), Sloan-Kettering Institute for Cancer Research ("Sloan-Kettering Institute"), and the Memorial Sloan-Kettering Cancer Center ("the Cancer Center"). The Cancer Center, a teaching institution, is affiliated with the Weill Medical College of Cornell University. The Cancer Center's staff physicians are all on the faculty at Cornell.

II. The Hospitals' Claims and Proceedings Below

A. Common Claims

Both Hospitals argue that they and their residents should not be required to pay Federal Insurance Contributions Act ("FICA") payroll taxes on the monies paid by the Hospitals to medical residents. FICA funds Social Security through payroll taxes. One of its provisions, the so-called "student exception," excludes from the definition of "employment" any services performed by a student "in the employ of a school, college, or university[,] ... who is enrolled and regularly attending classes at such school, college, or university." 26 U.S.C. § 3121(b)(10). Both Hospitals contend that work performed by their residents falls within this exception. The Cancer Center also relies on FICA's exclusion of "scholarships" from its definition of taxable wages. FICA imposes a tax only on "wages," which the statute defines as "all remuneration for employment," with certain exceptions. 26 U.S.C. § 3121(a). The Cancer Center claims that the funds it pays to residents are non-compensatory scholarships and therefore do not constitute "wages" under § 3121(a).

B. Albany Medical Center v. United States

AMC, which acted as the payroll agent for the monies paid to residents, traditionally paid FICA taxes on those monies. After an Eighth Circuit decision holding that residents were eligible to apply for a similarly worded student exception under 42 U.S.C. § 410(a)(10), see Minnesota v. Apfel, 151 F.3d 742, 747-48 (8th Cir.1998), AMC filed a refund application for the FICA taxes it had paid on resident monies between 1995 and 1999. The total amount of the claimed refund—which included both the employer and employee FICA contributions—was approximately $7.3 million.

When the Internal Revenue Service ("IRS") did not act on the claim, AMC filed a refund lawsuit against the IRS in the Northern District of New York in December 2004. The Government moved for summary judgment in October 2005. It argued then, as it does now, that AMC's residents were ineligible for the student exception as a matter of law. On January 10, 2007, the district court (Scullin, J.) granted summary judgment in favor of the Government.

The district court first agreed with the Government that the language of the student exception was ambiguous. The court acknowledged that residency programs had an educational component, but it observed that patient care was also important. Because it was unable, in light of these conflicting aspects of residency programs, to determine whether medical residents were students by reference to the statutory text alone, the court found it appropriate to review the legislative history. The court observed that when engaging in this interpretive exercise, it was required to "interpret federal social security legislation liberally" and "resolve any doubts in favor of coverage rather than exclusion." Albany Med. Ctr. v. United States, No. 04 Civ. 1399, 2007 WL 119415, *3, 2007 U.S. Dist. LEXIS 1929, at *6 (N.D.N.Y. Jan. 10, 2007).

Turning to the legislative history, the district court found that Congress had not intended medical residents to be eligible for the student exception. When Congress first established the student exception in 1939, it also enacted a separate exemption for work done by post-graduate medical interns. In 1965, however, Congress eliminated the medical intern exception. From this history, the district court concluded that Congress had intended the exceptions to be narrowly construed. It further found that if the student exception were...