State of Minnesota v. Kenneth S. Apfel ( 1998 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 97-3141
___________
State of Minnesota, *
*
Appellee, *
*
v. * Appeal from the United States
* District Court for the
Kenneth S. Apfel, Commissioner of * District of Minnesota.
Social Security; Social Security *
Administration, *
*
Appellants. *
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Submitted: March 12, 1998
Filed: July 6, 1998
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Before WOLLMAN and HANSEN, Circuit Judges, and GOLDBERG,1 Judge.
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WOLLMAN, Circuit Judge.
This case involves an assessment issued by the Commissioner of Social Security
against the State of Minnesota for unpaid social security contributions attributable to
stipends paid to medical residents enrolled in the graduate medical education program
at the University of Minnesota during 1985 and 1986. Following the issuance of the
1
The HONORABLE RICHARD W. GOLDBERG, Judge, United States Court
of International Trade, sitting by designation.
assessment, the State initiated an action seeking a redetermination of liability. The
district court2 granted summary judgment in favor of the State. We affirm.
I.
The inception of the social security system can be traced to the adoption of the
Social Security Act of 1935, 49 Stat. 620, as amended, 42 U.S.C. § 301 et seq. (1982
& Supp. II 1984).3 At that time, there was some question as to whether it would be
constitutionally permissible for Congress to compel the states and their political
subdivisions to participate in the system. For this reason, the Act initially excluded state
employees from the scope of its coverage. See 42 U.S.C. § 410(a)(7). In 1950,
however, Congress enacted section 418, which allows states and their political
subdivisions to voluntarily participate in the system by executing an agreement with the
Commissioner. See 42 U.S.C. § 418(a)(1).4 If a state enters into a section 418
agreement, covered employees and their employing agencies become subject to the
payment of social security contributions and, in return, the employees earn credit toward
social security old age and disability benefits.
To a certain extent, states have the ability to define the contours of their section
418 agreements. For example, states may designate particular groups of employees for
coverage. However, the provisions of the agreement may not be “inconsistent with the
provisions of” section 418. See 42 U.S.C. § 418(a)(1). In addition, section 418
2
The Honorable Ann D. Montgomery, United States District Judge for the
District of Minnesota.
3
In order to reflect the Act as it existed during the years 1985 and 1986, all
statutory references are to the 1982 United States Code.
4
Under section 418, agreements were initially executed between the states and
the Department of Health, Education, and Welfare. This department was subsequently
supplanted by the Department of Health and Human Services, which was in turn
succeeded by the Social Security Administration.
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provides for certain coverage exclusions, some of which are mandatory and some of
which are optional. Among the optional exclusions is an exclusion for “any agricultural
labor, or service performed by a student, designated by the State.” See 42 U.S.C. §
418(c)(5). Section 418 also provides that agreements may be modified at any time to
extend coverage to additional groups of state employees. See 42 U.S.C. § 418(c)(4).
Minnesota executed a section 418 agreement in 1955. See Administrative
Record (A.R.) at 1. Initially, this agreement applied to only a few limited coverage
groups. Shortly following the initial agreement, a number of subsequent modifications
were executed in order to extend coverage to various other groups. In 1958, the State
executed a modification adding “[s]ervices performed by individuals as employees” of
the University of Minnesota “as an additional coverage group.” A.R. at 13. This
modification listed several exclusions, one of which, consistent with section 418(c)(5),
excluded “[a]ny service performed by a student.” A.R. at 13.
For more than thirty years after execution of the 1958 modification, the
University did not withhold social security contributions from stipends paid to medical
residents at its teaching hospital; nor did it pay the employer’s share of contributions.
This practice was consistent with the University’s belief that medical residents were not
included in the coverage group identified by the 1958 modification. In 1989, the Social
Security Administration (SSA) initiated an investigation of the treatment of medical
residents under the State’s section 418 agreement. On September 13, 1990, the SSA
issued a formal notice of statutory assessment asserting that the State was liable for
unpaid social security contributions totaling nearly $8 million and that such
contributions were attributable to stipends paid to medical residents during the years
1985 and 1986. The State sought review of this assessment on administrative appeal,
and the assessment was affirmed without modification on December 8, 1993.
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The State then filed a civil action in district court pursuant to 42 U.S.C. § 418(t),5
seeking a redetermination of the assessment. Both the State and the Commissioner filed
motions for summary judgment. In addition, each party stipulated that the correct
amount of the assessment, if valid, was approximately $4.7 million.6 The district court
granted the State’s motion for summary judgment and overturned the assessment. In
doing so, the court relied upon alternative grounds. First, it held that the medical
residents were not “employees” of the University within the meaning of the 1958
modification. Second, it concluded that, even if the residents were employees under the
terms of the modification, they were excluded from coverage under the modification’s
student exclusion. The Commissioner now appeals.
II.
We review a grant of summary judgment de novo, applying the same standard as
that employed by the district court. See Rose-Maston v. NME Hospitals, Inc., 133 F.3d
1104, 1107 (8th Cir. 1998). Summary judgment is proper if the evidence, viewed in the
light most favorable to the nonmoving party, demonstrates the absence of any genuine
issue of material fact so that the moving party is entitled to judgment as a matter of law.
See id.; Fed.R.Civ.P. 56(c).
Generally, an administrative agency has considerable discretion in carrying out
the mandates of statutes it is entrusted to administer. See Mausolf v. Babbitt, 125 F.3d
661, 667 (8th Cir. 1997), cert. denied, 66 U.S.L.W. 3604 (U.S. June 26, 1998) (No. 97-
1443). We must defer to the agency’s decision so long as it “is not ‘arbitrary,
5
This section was repealed in 1986, see P.L. 99-509, § 9002(c)(1). It permitted
states to seek judicial review of an SSA assessment by filing “a civil action for a
redetermination of the correctness of the assessment of the amount due.”
6
Apparently, the original assessment of nearly $8 million was based on estimated
information rather than the University’s payroll records.
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capricious, an abuse of discretion, or otherwise not supported by law.’” Reder v.
Administrator of Fed. Aviation Admin., 116 F.3d 1261, 1263 (8th Cir. 1997) (quoting
Trans-Allied Audit Co., Inc. v. Interstate Commerce Comm’n, 33 F.3d 1024, 1030 (8th
Cir. 1994)).
The State, noting that section 418(t) provided for a “redetermination” of the
assessment, urges us to disregard this deferential standard in favor of a more probing
review. Whatever the merits of this argument, we conclude that the Commissioner’s
decision to uphold the assessment finds no support in law or fact and consequently fails
to survive even the most deferential standard of review.
A.
The first of the district court’s alternative holdings was that the residents were not
“employees” of the University as that term is used in the 1958 modification. The court
reasoned that the 1958 modification was a contract and that its terms must be interpreted
by giving effect to the intent of the parties. The court further concluded that
uncontroverted evidence demonstrated that when the parties executed the modification,
they did not intend to extend coverage to the medical residents7 and that this intent was
7
This determination is supported by a number of factors. First, the 1958
modification expressly stated that it was intended to cover 225 employees. In the fall
of 1958, there were 422 medical residents enrolled at the University of Minnesota.
Second, minutes from a meeting of the Board of Regents indicate that the modification
was intended to cover certain faculty positions only. Third, an Internal Revenue
Service Ruling issued prior to the modification indicated that stipends paid to medical
residents were excluded from wages because such stipends were paid primarily to
further the residents’ education and training. See Rev. Rul. 57-560 (1957). Finally, the
University had consistently treated the residents’ stipends as excluded from coverage
for more than thirty years.
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controlling regardless of post-1958 case law holding that medical residents are
employees.8
The Commissioner does not seriously dispute the district court’s conclusion that
the parties did not contemplate extending coverage to residents when they executed the
1958 modification. Rather, he contends that the modification is not contractual in nature
and that the parties’ intent in 1958 is irrelevant. In support of this proposition, the
Commissioner relies on the Supreme Court’s decision in Bowen v. Public Agencies
Opposed to Soc. Sec. Entrapment, 477 U.S. 41 (1986). Bowen involved a section 418
agreement executed in 1951 by the State of California. See id. at 48. The agreement
contained a provision, authorized by section 418(g), permitting California to terminate its
section 418 agreement by giving at least two years’ written notice. See id. at 48-49. In
1983, however, Congress amended section 418(g) to prohibit states from terminating
section 418 agreements “on or after April 20, 1983.” 42 U.S.C. § 418(g). That
amendment prevented states from withdrawing from the system even if a termination
notice had already been filed. See Bowen, 477 U.S. at 48. At the time of the amendment,
California had filed termination notices for a number of its employees. See id. at 49.
When the amendment prevented these notices from taking effect, the state initiated
proceedings to challenge the validity of the amendment. See id. California argued that
the right to terminate coverage for its employees was a contractual right and that the
amendment deprived them of this right without just compensation in violation of the Fifth
Amendment. See id.
The Supreme Court rejected this argument, concluding that amended section 418(g)
did not constitute a taking of property within the meaning of the Fifth
8
For example, since 1958, various courts have concluded that, for federal income
tax purposes, medical residents are considered employees. See, e.g., Rockswold v.
United States, 620 F.2d 166, 169 (8th Cir. 1980); Parr v. United States, 469 F.2d 1156,
1158 (5th Cir. 1972); Hembree v. United States, 464 F.2d 1262, 1264 (4th Cir. 1972).
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Amendment. See id. at 55-56. The Court first noted that in enacting the Social Security
Act, Congress had anticipated the need to be flexible in responding to changing social and
economic conditions. See id. at 51-52. For this reason, Congress expressly included a
provision reserving “[t]he right to alter, amend, or repeal any provision of” the Act. Id.
42 U.S.C. § 1304. In light of this express reservation of authority, the Court stated that
“courts should be extremely reluctant to construe § 418 Agreements in a manner that
forecloses Congress’ exercise of that authority.” Id. at 52.
The Court concluded that because Congress had expressly reserved the power to
amend section 418, it also retained concurrent power to affect the terms of agreements
entered into pursuant to that section. See id. at 53-54. As the Court explained, “The State
accepted the Agreement under an Act that contained the language of reservation. That
language expressly notified the State that Congress retained the power to amend the law
under which the Agreement was executed and by amending that law to alter the
Agreement itself.” Id. at 54.
The Court further held that any “contractual right” created by the agreement’s
termination clause did not rise to the level of “property” under the Fifth Amendment. See
id. at 55. The Court explained that the agreement’s termination clause “simply cannot be
viewed as conferring any sort of ‘vested right’ in the face of precedent concerning the
effect of Congress’ reserved power on agreements entered into under a statute containing
the language of reservation.” Id. at 55. Thus, the Court held that amended section 418(g)
was not an unconstitutional appropriation of property under the Fifth Amendment. See
id. at 55-56.
Relying on Bowen, the Commissioner argues that section 418 agreements are not
contracts at all but are instead merely written evidence that a state has exercised its
statutory option to participate in the social security program. We reject this interpretation.
Although Bowen holds that section 418 agreements are subject to
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modification by Congress, it does not broadly dismiss such agreements as non-contractual.
To the contrary, the Court’s decision is replete with references to “contractual
arrangements.” Indeed, the backdrop against which the Court examined California’s
assertions was that “contracts should be construed, if possible, to avoid foreclosing
exercise of sovereign authority.” Id. at 52-53. Thus, far from holding that section 418
agreements are non-contractual, the Court in Bowen actually assumed that such
agreements are contracts. This assumption is further supported by section 120 of the
Commissioner’s Handbook for State Social Security Administrators, which recognizes
that “[e]ach modification, like the original agreement, is a Federal-State contract.”
The Commissioner argues that because Bowen concluded that California’s section
418 agreement did not confer a Fifth Amendment property interest, the underlying
agreement cannot be considered a contract. This argument distorts the Court’s analysis,
which merely recognized that some contractual rights are not necessarily property
interests within the meaning of the Fifth Amendment. In particular, contractual terms
subject to modification by Congress do not rise to the level of a Fifth Amendment
property interest. See Bowen, 477 U.S. at 51-52; Education Assistance Corp. v. Cavazos,
902 F.2d 617, 628 (8th Cir. 1990) (“Whether a contractual right against the United States
constitutes a vested property right for fifth amendment purposes depends on whether
Congress reserved power to alter the terms of the contract”). It does not follow that such
terms are not contractual in nature.
Nevertheless, the Commissioner insists that the definition of “employer” has been
construed since 1958 to include medical residents and that this definition should control
regardless of the parties’ original intent and understanding. As the district court pointed
out, however, the meaning of section 418 agreements cannot be altered “through ruling
by the the [sic] SSA or through subsequent case law developments regarding the
employment status of medical residents.” Memorandum Opinion & Order at 12. The
power to alter the terms of section 418 agreements lies exclusively
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with Congress. Because Congress has not chosen to alter or amend the meaning of the
State’s 1958 modification, the parties’ intent is controlling. See Enos v. Key
Pharmaceuticals, Inc., 106 F.3d 838, 839 (8th Cir. 1997); Frank B. Hall & Co., Inc. v.
Alexander & Alexander, Inc., 974 F.2d 1020, 1023 (8th Cir. 1992). Accordingly, we
agree with the district court that the residents were not employees of the University under
the terms of the 1958 contract.
B.
The district court held, alternatively, that even if medical residents were considered
“employees” under the terms of the 1958 modification, the residents are excluded from
coverage under the agreement’s student exclusion. As noted above, the student exclusion
is authorized by section 418(c)(5), which provides that “[s]uch agreement shall, if the
State requests it, exclude (in the case of any coverage group) any agricultural labor, or
service performed by a student, designated by the State.” 42 U.S.C. § 418(c)(5). Section
418(c)(5) also cross-references the Act’s general student exclusion, section 410(a)(10),
which applies 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.” 42 U.S.C. § 418(a)(10).
In arguing that the residents do not qualify for the student exclusion, the
Commissioner relies principally upon Rockswold v. United States, 620 F.2d 166 (8th Cir.
1980). In Rockswold, we concluded that stipends paid to residents at the University of
Minnesota’s teaching hospital constituted payment for services rather than scholarships
or fellowship grants and that such stipends were therefore not excludable from the
residents’ gross income for income tax purposes. See id. at 169. Our focus was on the
nature of the stipends paid to the residents; thus, the “threshold question” was “whether
the payment was made as quid pro quo for the services rendered.” Id. Because we found
that the payments were intended to compensate
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residents for services they rendered, we concluded that the payments were not
scholarships or fellowship grants. See id.
In the present case, however, we focus not on the nature of the payments made to
the residents but on the nature of the residents’ relationship with the University. The
regulation implementing the student exclusion provides: “Whether you are a student for
purposes of this section depends on your relationship with your employer. If your main
purpose is pursuing a course of study rather than earning a livelihood, we consider you
to be a student and your work is not considered employment.” See 20 C.F.R. §
404.1028(c). Thus, if the residents’ participation in the University’s residency program
is primarily educational, the residents should be considered students. If their purpose is
to earn a living, however, they do not fit within the definition of the student exclusion.
The fact that payments received by the residents constitute taxable income does not
mean that the primary purpose of their relationship with the University is not educational.
We recognized as much in Rockswold, despite our ultimate conclusion that the stipends
paid to the residents represented a quid pro quo for services rendered. Specifically, we
noted that the University’s residency program “is designed to educate and train physicians
so that they can pursue careers in academic medicine and medical research.” Id. at 167;
see also Parr, 469 F.2d at 1157 (although teaching hospital was “operated primarily for
the purpose of training doctors,” payments made to residents were primarily
compensatory); Hembree, 464 F.2d at 1264 (although primary purpose of teaching
hospital was training of physicians rather than treatment of patients, payments made to
residents were primarily compensatory). The Commissioner acknowledges this
distinction, but maintains that in this case there is no logical reason to distinguish between
the purpose of the payments and the purpose of the relationship because the purpose of
each is the same. The undisputed facts make it clear, however, that the primary purpose
for the residents’ participation in the program is to pursue a course of study rather than
to earn a livelihood. See 20 C.F.R. § 404.1028(c). The
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residents are enrolled at the University, pay tuition, and are registered for approximately
fifteen credit hours per semester. Although they provide patient services while working
at the hospital, it does not follow that they are enrolled primarily to earn a livelihood.9
Finally, the Commissioner urges us to defer to Social Security Ruling 78-3, which
states that “the Social Security Administration has always held that resident physicians
are not students.” SSR 78-3. Social Security Rulings, although entitled to deference, are
not binding or conclusive. Newton v Chater, 92 F.3d 688, 693 (8th Cir. 1996). Such
rulings “have neither the force nor effect of law or Congressionally promulgated
regulations.” See id. Thus, we will not defer to rulings that are “plainly erroneous or
inconsistent with the Act or regulations.” Chavez v. Department of Health & Human
Serv., 103 F.3d 849, 851 (9th Cir. 1996). The bright-line rule of SSR 78-3 is inconsistent
with the approach set forth at 20 C.F.R. § 404.1028(c), which contemplates a case-by-
case examination to determine if an individual’s relationship with a school is primarily for
educational purposes or primarily to earn a living. The Commissioner cannot avoid such
a case-by-case examination by summarily concluding that medical residents are never
students regardless of the nature of their relationship with their employer.
The judgment is affirmed.
9
The Commissioner contends that the stipends, which ranged from $20,000 to
$28,000 per year, constituted “an amount far above what one would ordinarily think
of as a scholarship.” Appellant’s Brief at 30. This argument misstates the issue. The
question is not whether stipends paid to the residents were scholarships -- indeed, the
State concedes that they were not. Rather, the question is whether the residents were
students within the meaning of the student exclusion. This question depends not on the
nature of the stipends but on the nature of the residents’ relationship with the
University.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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