Ansar H. Ahmed v. United States ( 1998 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 97-1845
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Ansar H. Ahmed; Andrew Matthews, *
M.D.; Laura L. Schmitz, M.D.; Taylor *
E. Neff, M.D.; Steven M. Falk, M.D.; *
David R. Hardten, M.D.; John C. *
Lillehei, M.D.; William G. Nelson, *
M.D.; Susan F. Sencer, M.D.; James B. *
Redmon, M.D.; William C. Heegaard, *
M.D.; N. Judge King, M.D.; Kevin R. *
Walker, M.D.; Kenneth K. Maslonka, *
M.D.; Stephanie A. Hedstrom, M.D.; * Appeal from the United States
Kristen J. Paddon, M.D.; Daniel D. * District Court for the
Zimmerman, M.D.; Margaret B. Zander, * District of Minnesota.
M.D.; David J. Slomiany, M.D.; *
Barbara P. Strohbehn, M.D.; Scott E. *
Julian, M.D.; Matthew P. Jones, M.D.; *
James D. Walter, M.D.; Terry R. *
Bowers, M.D.; Thomas Knickelbine, *
M.D.; David Shafran, M.D.; Michael T. *
Valley, M.D.; Kathryn Lefper, M.D.; *
Mary D. Rathgaber, M.D.; Kwan Cho, *
M.D.; Richard J. Gordon, M.D.; *
Michael P. McNevin, M.D.; Rosario *
Del Maria Crau, M.D.; Jerry J. Blow, *
M.D.; Eduardo Esper, M.D.; John K. *
Randall, M.D.; Michael K. Case, M.D.; *
Deepak M. Kamat, M.D.; James J. *
Schuh, M.D.; Katherine M. Clinch, *
M.D.; Christoph A. Friedrich, M.D.; *
Jeffrey D. Larsen, M.D.; Scott W. *
Rathgaber, M.D.; David M. Leon, *
M.D.; William J. Wengs, M.D.; Sanjay *
R. Parikh, M.D.; Gregory C. Reuter, *
M.D.; Gregory L. Miller, M.D.; Michael *
H. Ryan, M.D.; Philip L. Prosapio, *
M.D.; Thomas E. Nelson, M.D.; Richard*
A. Stangler, M.D.; Richard J. Fischel, *
M.D.; Joseph E. Dohar, M.D.; David A. *
Gross, M.D.; Kathryn L. Pyzdrowski, *
M.D.; John A. Faber, M.D.; Scott A. *
Gruber, M.D.; Maureen C. Holasek, *
M.D.; Nancy G. Silvis, M.D.; Eugenio *
Guzman, M.D.; Craig R. Peterson, *
M.D.; David J. Fang, M.D.; Gary L. *
Clayman, M.D.; Pradeep Singh, M.D.; *
Alan J. Bank, M.D.; Nigel S. Key, *
M.D.; Kenneth L. Brayman, M.D.; *
Thomas F. Tuttle, M.D.; Michelle M. *
Tichey, M.D.; Wesley R. Grootwassink, *
M.D.; Christopher Carlson, M.D.; *
Rodney J. McCutcheon, M.D.; Lee A. *
Johnson, M.D.; Suzanne M. Powell, *
M.D.; Sharon R. May, M.D.; Durand E. *
Burns, M.D.; Danl P. McCormick, *
M.D.; Nabat Jetha, M.D.; Paul R. Rust, *
M.D.; Audrey A. Caine, M.D.; Mitchell *
T. Wallin, M.D.; Keith P. Dahlhauser, *
M.D.; Raj P. Terkonda, M.D.; Jamshid *
Niknam, M.D.; Antonio Gil-Nagel, *
M.D.; Paul E. Savoca, M.D.; Jon W. *
Jones, M.D.; Timothy R. Olsen, M.D.; *
Rafael O. Hernandez, M.D., *
*
Appellants, *
*
v. *
*
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United States of America, *
*
Appellee. *
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Submitted: March 12, 1998
Filed: July 17, 1998
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Before WOLLMAN and HANSEN, Circuit Judges, and GOLDBERG,1 Judge.
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WOLLMAN, Circuit Judge.
The appellants (the residents), a group of former medical residents at the
University of Minnesota Medical Center, appeal from an order of the district court
dismissing their action seeking refund of Federal Insurance Contributions Act (FICA)
taxes paid to the United States. We affirm, although for a reason different from that
relied upon by the district court.
I.
The social security system is essentially “a form of social insurance . . . whereby
persons gainfully employed, and those who employ them, are taxed to permit the
payment of benefits to the retired and disabled, and their dependants.” Flemming v.
Nestor, 363 U.S. 603, 609 (1960). Among the various taxes supporting the system are
FICA taxes, also known as social security taxes. Under section 3101(a) of the Internal
Revenue Code, FICA taxes are imposed on “wages” received by individuals “with
respect to employment.” 26 U.S.C. § 3101(a). These taxes are to be collected by
1
The HONORABLE RICHARD W. GOLDBERG, Judge, United States Court
of International Trade, sitting by designation.
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employers by withholding the proper amount from the wages of their employees. See 26
U.S.C. § 3102(a). Employers are required to pay FICA taxes in an amount identical to
that withheld from the wages of their employees. See 26 U.S.C. § 3111(a). Thus, FICA
taxes are “paid in part by employees through withholding, and in part by employers
through an excise tax.” United States v. Lee, 455 U.S. 252, 254 n.1 (1982) (citation
omitted).
Unlike private employees, employees of states and their political subdivisions are
not compelled to participate in the social security system and thus are not subject to
mandatory FICA taxes. See 26 U.S.C. § 3121(b)(7). However, states may voluntarily
participate in the system by executing an agreement (section 418 agreement) with the
Commissioner of Social Security. See 42 U.S.C. § 418(a)(1). If a state chooses this
route, employees that fall within the scope of the agreement become subject to the
payment of FICA taxes, as does the employing state agency. In 1955, the State of
Minnesota executed a section 418 agreement identifying certain limited coverage groups
of state employees. This agreement was modified in 1958 to add employees of the
University of Minnesota as an additional coverage group.
For more than thirty years after this modification, the University did not withhold
FICA taxes from stipends paid to medical residents enrolled in the University’s graduate
medical education program, nor did it pay the employer’s portion of FICA taxes on such
stipends. This failure to withhold reflected the University’s belief that the residents were
not included in the coverage group identified in the 1958 modification. On September
13, 1990, the Social Security Administration issued an assessment determining that the
University’s failure to withhold had been improper and that the State of Minnesota was
therefore liable for nearly $8 million in unpaid social security contributions attributable
to the years 1985 and 1986. Although the State
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challenged this assessment,2 the University elected to withhold FICA taxes from the
residents’ stipends beginning on October 1, 1990, and continuing through December 31,
1991. The University then ceased this practice and on July 12, 1993, filed a timely
refund claim with the Internal Revenue Service (IRS) seeking refund of the employer’s
share of FICA taxes paid during the period of withholding. In addition, because the
residents had authorized the University to file administrative claims on their behalf
pursuant to 26 C.F.R. 31.6402(a)-2(a)(2)(i), the University also sought refund of the
employee share of FICA taxes withheld from October 1, 1990, to December 31, 1991.
In support of its refund claim, the University contended that: (1) the residents were not
covered employees under the terms of the 1958 modification; and (2) even if they were
otherwise covered, the residents were excluded under the modification’s student
exclusion.
On March 28, 1996, the residents, frustrated by a perceived lack of progress3 and
desirous of asserting an additional ground for relief, commenced a civil action in district
court pursuant to 26 U.S.C. § 7422 asserting that they were entitled to a refund under
Section 530 of the Revenue Act of 1978, 26 U.S.C. § 3401 note (section 530).4 The
government moved for dismissal or, in the alternative, for summary judgment. On
January 6, 1997, the district court issued an order granting the government’s motion
2
The State initially sought review on administrative appeal, but the Commissioner
affirmed the assessment without modification. The State then filed a civil action in
district court seeking a redetermination of the assessment. The district court granted
summary judgment to the State, holding that the residents’ stipends were not subject
to withholding and that the assessment was invalid. We recently affirmed that decision.
See State of Minnesota v. Apfel, No. 97-3141, slip. op. (8th Cir. July 6, 1998).
3
The University’s administrative claim was still pending on this date. On
December 5, 1996, the IRS issued a tentative disallowance of the University’s claim.
4
Section 530 is not codified as part of the Internal Revenue Code and appears
only in the notes following 26 U.S.C. § 3401.
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and dismissing the residents’ action with prejudice. The court concluded that it lacked
jurisdiction over the residents’ claims because the residents had failed to comply with
section 7422(a), which requires that an administrative refund claim precede the filing of
a refund suit in federal court. The residents now appeal.
II.
Section 7422(a) of the Internal Revenue Code provides:
No suit prior to filing claim for refund. -- No 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, or of any penalty
claimed to have been collected without authority, or of any sum alleged to
have been excessive or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Secretary, according to the
provisions of law in that regard, and the regulations of the Secretary
established in pursuance thereof.
26 U.S.C. § 7422(a). This section “imposes, as a jurisdictional prerequisite to a refund
suit, filing a refund claim with the IRS that complies with IRS regulations.” Chicago
Milwaukee Corp. v. United States, 40 F.3d 373, 374 (Fed. Cir. 1994). The pertinent
regulations are set forth at 26 C.F.R. § 31.6402(a)-2. Under these regulations, an
employee may pursue an administrative refund claim in one of two ways. The employee
may file an individual administrative refund claim, but only if “the employee does not
receive reimbursement in any manner from the employer and does not authorize the
employer to file a claim and receive refund or credit.” 26 C.F.R. § 31.6402(a)-2(b)(1)(i).
Alternatively, an employee may authorize his employer to file an administrative claim on
his behalf by providing the employer with written consent “to the allowance of the refund
or credit.” 26 C.F.R. 31.6402(a)-2(a)(2)(i). In addition, the employer must submit a
statement stating “that the employer has obtained from the employee a written statement
(a) that the employee has not claimed refund or
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credit of the amount of the overcollection . . . and (b) that the employee will not claim
refund or credit of such amount.” 26 C.F.R. § 31.6402(a)-2(a)(2)(ii).
The district court held that because they had not filed individual administrative
claims but had instead authorized the University to seek a refund on their behalf, the
residents failed to satisfy section 7422(a). The district court concluded that the residents’
partial compliance with the regulations was insufficient:
Although the University appropriately filed the “employer claim,” [the
residents] may not create a hybrid of requirements and argue that the Statute
has been satisfied. They cannot comply with half of the employee filing
requirements and half of the employer filing requirements and then assert
that this conduct, as a whole, meets the requirements of the Statute. Such
a reading of the Regulations ignores the distinction between the employee
and employer filing requirements and renders meaningless [the residents’]
statements that they would not file claims.
Ahmed v. United States, 1997 WL 151974 *3 (D. Minn. Jan. 6, 1997).
Section 7422(a) requires only that the civil action be preceded by an administrative
claim and that the administrative claim comply with the regulations. The purpose of this
requirement is to ensure that parties seek administrative remedies before bringing suit in
federal court. Here, the residents did just that -- an administrative claim was filed on
their behalf nearly three years before they filed the present action. However unorthodox
(or hybrid, to use the district court’s description) the nature of the administrative claim,
it was sufficient to satisfy the fair notice requirements of section 7422(a).
The government makes much of the fact that the residents, when authorizing the
University to proceed on their behalf, were required to execute a written statement
indicating that they would “not claim refund or credit of such amount.” 26 C.F.R. §
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31.6402(a)-2(a)(2)(ii)(b). The government argues that the term “claim” should be
construed broadly to include not only administrative claims for refund but also civil
actions for a refund. Thus, the government argues that by executing this statement, the
residents voluntarily relinquished their right to file suit in federal court. However, this
reading of the term “claim” ignores the context in which it appears. The procedures set
forth in 26 C.F.R. § 31.6402(a)-2 govern the filing of administrative claims and have no
application outside the administrative arena. Thus, the residents’ failure to file individual
administrative claims does not preclude their bringing an action under section 7422(a).
III.
Although we conclude that the district court erred in dismissing the action on
jurisdictional grounds, the dismissal can be affirmed on another ground.5 As indicated
above, the residents base their claim for relief upon section 530 of the Revenue Act of
1978. Section 530 was enacted by Congress “to alleviate what was perceived as overly
zealous pursuit and assessment of taxes and penalties against employers who had, in
good faith, misclassified their employees as independent contractors.” Boles Trucking,
Inc. v. United States, 77 F.3d 236, 239 (8th Cir. 1996). Section 530 provides, in
pertinent part:
(a) Termination of certain employment tax liability. --
(1) In general. -- If --
(A) for purposes of employment taxes, the taxpayer did not
treat an individual as an employee for any period, and
(B) in the case of periods after December 31, 1978, all Federal
tax returns (including information returns) required to be
5
“We may affirm the district court’s decision on any ground supported by the
record.” Wald v. Southwestern Bell Corp. Customcare Med. Plan, 83 F.3d 1002, 1005
(8th Cir. 1996).
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filed by the taxpayer with respect to such individual for such period are filed
on a basis consistent with the taxpayer’s treatment of such individual as not
being an employee, then for purposes of applying such taxes for such period
with respect to the taxpayer, the individual shall be deemed not to be an
employee unless the taxpayer had no reasonable basis for not treating such
individual as an employee.
Section 530(a), 26 U.S.C. § 3401 note. Thus, section 530 allows employers to avoid
liability for past-due employment taxes when the employer erroneously but reasonably
classified employees as independent contractors rather than employees. See Standard
Office Bldg. Corp. v. United States, 819 F.2d 1371, 1382 (7th Cir. 1987).
By its very terms, section 530 is a relief provision available only to employers who
erroneously classify their employees. Section 530 applies if (1) the taxpayer does not
treat a worker as an employee for employment tax purpose during a particular period; (2)
the taxpayer files all required federal employment tax returns on a basis consistent with
this treatment; and (3) the taxpayer has a reasonable basis for not treating the worker as
an employee. See Springfield v. United States, 88 F.3d 750, 753 (9th Cir. 1996). If
these requirements are satisfied, tax liability is terminated “for purposes of applying such
taxes for such period with respect to the taxpayer.” See Section 530(a)(1)(B), 26 U.S.C.
§ 3401 note (emphasis supplied). Notwithstanding the clarity of the statute, the residents
contend that a broad interpretation of the term “taxpayer” is appropriate because they are,
at least in a general sense, “taxpayers.” We do not agree, for the focus of section 530 is
on the taxpayer’s treatment of the taxpayer’s employees. In this context, it is clear that
the term “taxpayer” refers only to employers and not to employees.
Furthermore, even if section 530 were construed to authorize relief for employees
as well as employers, the residents’ claim would remain baseless. The language of
subsections (a)(1)(A) and (a)(1)(B) limits application of section 530 to
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those situations in which an employer failed to treat an individual as an employee during
the particular period in question. Here, on the other hand, the taxes that the residents
allege they overpaid were collected because the University did treat the residents as
employees during the period in question by withholding FICA taxes from their stipends.
The residents nevertheless insist that because the University did not treat them as
employees “for any period,” their employment tax liability has been forever terminated.
Section 530 does not confer eternal immunity from employment tax liability, however;
it merely eliminates liability for those discrete periods of time during which the employer
erroneously but reasonably failed to treat an individual as an employee.
We conclude that because section 530 does not provide a basis upon which relief
can be granted, the residents’ claim should have been dismissed on this ground. See Fed.
R. Civ. P. 12(b)(6).
As a final matter, we note that both the government and the residents agree that the
district court erred in dismissing the suit with prejudice because the dismissal was based
on jurisdictional grounds. Under Rule 41(b) of the Federal Rules of Civil Procedure,
dismissal for lack of jurisdiction is not an adjudication on the merits and thus such a
dismissal should be without prejudice. See Johnson v. Boyd-Richardson Co., 650 F.2d
147, 148 (8th Cir. 1981) (“when a dismissal is for ‘lack of jurisdiction,’ the effect is not
an adjudication on the merits”). However, under the same rule, a dismissal for failure to
state a claim upon which relief can be granted is an adjudication on the merits. See
Federated Department Stores, Inc. v. Moitie 452 U.S. 394, 399 n.3 (1981). Given our
holding that the residents have not stated a claim under section 530 that is the effect of
the dismissal here.
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The judgment is affirmed.6
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
6
Nothing in our opinion should be construed as precluding the residents from
ultimately recovering their respective share of FICA taxes in the University’s
administrative claim or in any civil action subsequently commenced by the University.
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