Johnson City Medical Center v. United States , 999 F.2d 973 ( 1993 )

KEITH, Circuit Judge.

Plaintiff-Appellant, Johnson City Medical Center (“the hospital”), appeals from the district court’s judgment on behalf of the United States, dismissing all of the plaintiffs claims for recovery of FICA taxes. For the reasons stated below, we AFFIRM.

I.

This is a case of first impression regarding the interpretation of an exception for certain services performed “as a student nurse” from coverage under the Federal Insurance Contribution Act (FICA), I.R.C. §§ 3101-3128. On June 21,1989, Johnson City Medical Center Hospital (“the hospital”), filed a complaint with the district court seeking to recover FICA taxes collected by the IRS for 18 student nurses employed from 1983 through 1986. They argued that the taxes were erroneously assessed, because the services of the student nurses were exempted under the student nurse exception in the Internal Revenue Code.

The hospital is a community non-profit health care institution in Johnson City, Tennessee. During 1985 and 1986, the hospital employed the 18 student nurses in this case, who were all attending a nurse training program at East Tennessee State University (ETSU). These employees worked in different capacities in the hospital, including nurse technician, nurse extern, administrative control center (ACC) secretary, nursing assistant and licensed practical nurse.

Nurse technicians were required to have completed the first semester of clinical instruction. The general duties of nurse technicians included direct patient care, giving baths, taking vital signs, and performing minor treatments. Nurse externs were all senior nursing students, whose general duties included giving baths, taking vital signs, walking and turning patients, and inserting feeding tubes, under supervision. The ACC secretary position required no previous experience and was open to high school graduates. The duties included answering patient call lights, checking x-ray orders, assisting in transcribing physician orders and securing medications from the pharmacy. Nurse assistants were not required to be enrolled in nursing school, and provided direct patient care. The licensed practical nurses (LPN’s) were required to be graduates of nursing school and licensed to practice in Tennessee. The LPN’s provided direct patient care, were responsible for the nursing care of the patients assigned to them, and supervised nurse assistants and nurse technicians.

The student nurses were all paid less than registered nurses (RN’s), and worked no more than 40 hours per two week pay period. The student nurses did not receive credit toward their nursing degree with ETSU for their employment with the hospital. Although ETSU conducted a clinical program at the hospital, it was separate from the hospital’s hiring of student nurses as employees.

From 1983 to 1986, the hospital made FICA payments on behalf of the nursing student employees in this case. The amounts at issue consist of wages earned during the time that the student nurses were employed at the hospital and enrolled as nursing students. By the time of trial, the total refund sought by the hospital was $3,496 for 1985 and 1986.

The district court held a one-day bench trial on April 25, 1991. On February 7,1992 the court entered a final judgment on behalf of the United States dismissing all of the hospital’s claims. 783 F.Supp. 1048. The district court based its decision on Revenue Ruling 85-74. The district court determined that the agency interpretation contained in Revenue Ruling 85-74 was not repugnant to the statute or its legislative history. Furthermore, the court found that the services of the student nurses were not exempted because they were not incidental to obtaining a degree. The student nurses did not receive academic credit for their work, the services were sporadic and unconnected to an educational plan, and their earnings were not nominal. On April 3, 1992, the hospital filed a timely notice of appeal.

II.

As both parties agree, the primary issue in this case is the interpretation of the following Internal Revenue Code provision regarding the exemption of student nurses as employees:

any service, of whatever nature, performed ... by an employee for the person employing him ... except that such term shall not include—

(13) service performed as a student nurse in the employ of a hospital or a nurses’ training school by an individual who is enrolled and is regularly attending classes ■in a nurses’ training school chartered or approved pursuant to State law.

I.R.C. § 3121(b)(13). In 1985, the IRS issued a Revenue Ruling explaining the student nurse exception and the applicable legislative history as follows:

In enacting the exception under section 3121-(b)(13) of the Code, Congress stated that “[t]he intent of the amendment is to exclude those persons and those organizations in which the employment is part-time or intermittent; and the total amount of earnings is only nominal, and the payment of the tax is inconsequential and a nuisance. The benefit rights built up are also inconsequential. Many of those affected, such as students ... will have other employment which will enable them to develop insurance benefits.” H.R.Rep. No. 728, 76th Cong., 1st Sess. 18 (1939), 1939-2 C.B. 538, 543.

The language of the statute, including use of the phrase “student nurse,” and the legislative history indicate Congress’ intent to except services as a student nurse from the definition of employment only if the following three requirements are met:

(1) The employment is substantially less than full time,

(2) The total amount of earnings is nominal, and

(3) The only services performed by the student nurse for the employer are incidental parts of the student nurse’s training toward a degree which will qualify him or her to practice as a nurse or in a specialized area of nursing.

Revenue Ruling 85-74, 1985-1 C.B. 331, 332.

The hospital interprets the language of § 3121(b)(13) to exclude from FICA coverage employees who are also nursing students. The government interprets the language as excluding only nursing students who are working in the hospital as part of their training for a degree. In its decision, the district court concluded that, pursuant to Revenue Ruling 85-74, the services of the student nurses were not exempted from employment under § 3121(b)(13). Because this case is one of statutory construction, this Court’s scope of review is de novo. United States v. Buckley, 934 F.2d 84, 87-88 (6th Cir.1991).

When an agency is charged with the interpretation of a statute this Court must follow the dictates of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). The Chevron court set forth the following standard:

When a court reviews an agency’s construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather if the statute is silent or ambiguous with respect to the specific issues, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.

Id. at 842-43, 104 S.Ct. at 2781-82 (emphasis added).

The reviewing “‘court need not conclude that the agency construction was the only one it permissibly could have adopted to uphold the construction, or even the reading the court would have reached if the question initially had arisen in a judicial proceeding.’ ” CenTra, Inc. v. United States, 953 F.2d 1051, 1055-56 (quoting Chevron U.S.A, 467 U.S. at 843 n. 11, 104 S.Ct. at 2782 n. 11) (1992). Instead, “a Revenue Ruling is entitled to some deference unless ‘it conflicts with the statute it supposedly interprets or with that statute’s legislative history or if it is otherwise unreasonable.’ ” CenTra, Inc., 953 F.2d at 1056; See also Threlkeld v. Commissioner 848 F.2d 81, 84 (6th Cir.1988) (citing Brook, Inc. v. Commissioner, 799 F.2d 833, 836 n. 4 (2d Cir.1986)).

In our analysis, this Court must first determine whether Congress’ intent as to § 3121(b)(13) is clear and unambiguous. A brief historical overview of the origination of the exception is- necessary in order to make that determination.

FICA involves the contributory aspect of a system of old age insurance which was passed by Congress under the Social Security Act of 1935. An employee’s eligibility for FICA benefits depends upon the total wages received, the periods during which wages were paid, and a minimum work requirement. Helvering v. Davis, 301 U.S. 619, 635, 57 S.Ct. 904, 906, 81 L.Ed. 1307 (1937). Contribution is made by taxing the employees and employers. The income tax on employees is collected by the employers through deductions in pay.

In 1939, Congress passed the Social Security Act Amendments of 1939, which included exclusions to FICA. The student nurse exception is an exclusion contained in one of the 1939 amendments. Congress’ rationale for these type of exclusions was as follows:

In order to eliminate the nuisance of inconsequential tax payments the bill excludes certain services performed for fraternal benefit societies and other nonprofit institutions exempt from income tax, and certain other groups. While the earnings of a substantial number of persons are excluded by the recommendation, the total amount of earnings involved is undoubtedly very small ... The intent of the amendment is to exclude those persons and those organizations in which the employment is part-time or intermittent and the total amount of earnings is only nominal, and the payment of the tax. is inconsequential and a nuisance.

H.R.Rep. No. 728, 76th Cong., 1st Sess. (1939), reprinted in 1939-2 C.B. 538.

In 1939, when this exception was passed, the majority of nursing schools were owned and operated by hospitals. The Advance of American Nursing 160-61, 484, 646-47 (2d ed. 1986) (American Nursing). Students lived at the hospital, and were often provided with room, board and a stipend. Id. at 3.00, 391, 581. In order to pay for their education, students performed direct patient care services. Id. at 656. Nursing education has subsequently changed significantly. The majority of training is now received in an academic setting, as evidenced by the closing of hundreds of hospital-based schools. Id. at 704-05.¹

The exception appears to be available to any student nurse who is enrolled and attending classes in an approved nurses’ training school, regardless of whether the student received academic credit for his employment. This interpretation, however, gives rise to an inherent ambiguity within the statute. According to the historical context in which this provision was passed, the exception was intended for students whose employment would be credited toward their degree, as was required in 1939. In light of this ambiguity, this Court must reach the second tier of analysis under Chevron, and determine whether the agency’s position is based upon a permissible construction of the statute.

A revenue ruling, as opposed to a legislative regulation, is an interpretive regulation which is “not entitled to the deference accorded a statute.” Threlkeld v. Commissioner, 848 F.2d 81, 84 (6th Cir.1988). Nevertheless, “a revenue ruling is entitled to some deference unless ‘it conflicts with the statute it supposedly interprets or with that statute’s legislative history or if it is otherwise unreasonable.-’ ” CenTra, 953 F.2d at 1056 (quoting Threlkeld, 848 F.2d at 84).

Revenue Ruling 85-74 sets forth three conditions to be met for the Student Nurse Exemption to apply:

1. The employment is substantially less than full time;

2. The total amount of earnings is nominal; and

3. The only services performed by the student nurse are incidental parts of the student nurse’s training toward a degree which will qualify him or her to practice as a nurse in a specialized area of nursing.

Rev. Rul. 85-74, 1985-1 C.B. 331.

On appeal, the hospital challenges the third condition asserting that it is disconnected from any authority, and therefore outside of the realm of permissible agency interpretation. The hospital argues that the third condition contradicts Congress’ intent to preserve through the enactment of § 3121(b)(13) a recognized FICA exemption for the benefit of student nurses. An incorporation of the requirements of the Revenue Ruling would render the Student Nurse Exemption meaningless, because, student nurses no longer receive academic credit for the paid services rendered. Student nurses only receive academic credit for clinical rotations in hospitals, for which they do not receive pay.

The government does not contest the fact that the third condition of the revenue ruling nullifies § 3121(b)(13). However, the government argues that this change is not due to the revenue ruling, but instead to changes in nursing education, where the responsibility for educating nurses has shifted from hospitals to educational institutions. As the government argues in its brief, “hospitals are no longer the primary trainers of nursing students employed in degree programs; they are the primary employers of nursing students trained by degree programs.” (Appel-lee’s Brief at 36).

The hospital has not levied a plausible argument that the revenue ruling conflicts with the legislative history of the student nurse exception, or is unreasonable in any other way. The revenue ruling simply reflects the legislative history of the statute, that the exception be granted to those student nurses who are receiving academic credit for their work. Therefore, this Court accords deference to Revenue Ruling 85-74 under the standard set forth in Chevron.

III.

The hospital’s final argument is that even if Revenue Ruling 85-74 is valid, the district court erred in applying it to the facts of this case. Specifically, the hospital asserts that the district court erred in concluding that the student nurse wages were not material and that their services were not an incidental part of their training.

In its opinion, the district court reasoned that the wages were not nominal when it noted that the earnings of the student nurses:

... ranged from $4,852.24 for a seven-month period down to $46.67 for a student nurse who worked one 8)6 hour shift. Student nurses were compensated the same as other employees who worked the same number of hours.

Johnson City, 783 F.Supp. at 1052. The evidence in this case showed that the student nurses earned between $4.48 and $10.13 per hour during the pay periods in question.

The hospital argues that the district court incorrectly analyzed the wages of the student nurses. Specifically, the hospital contends that the statute which establishes the categories of FICA-exempt employment specifically directs that eligibility for exemptions be determined on a “pay period” basis. 26 U.S.C. § 3121(c). That section provides, in relevant part:

(c) Included and excluded services — For purposes of this chapter, if the services performed during one-half or more of any pay period by an employee for the person employing him constitute employment, all the services of such employee for such period shall be deemed to be employment; but if the services performed during more than one-half of any such pay period by an employee for the person employing him do not constitute employment, then none of the services of such employee for such period shall be deemed to be employment.

I.R.C. § 3121(c).

The hospital claims that the district court ignored the instructions of the above statute, and aggregated multiple pay periods in order to conclude that one of the student nurses earned over $4,852.24 in one seven-month pay period.

The government argues that § 3121(c) does not apply to the facts of this case because the statute is only relevant in situations where an employee does two types of work for the same employer. Inter-City Truck Lines, Ltd. v. United States, 408 F.2d 686, 687, 187 Ct.Cl. 290 (1969) (legislative history of section 3121(c) indicates that the section only applies to situations where an employee performs two different kinds of work for one employer). In this case, the nursing students provided the same essential services, regardless of their pay period. Therefore, the district court did not err in its calculation of wages, because nominal pay criteria need not be determined on a pay period basis.

The hospital also argues that the services performed by the student nurses were incidental parts of their training toward a nursing degree. The hospital states that “a clear and practical nexus existed between the Student Nurses’ work and their formal training.” (Appellant’s Brief at 40). According to the hospital, the student nurses performed services germane to nursing care, enhancing their education. There is no dispute, however, that the services were not connected to any formal course of training. Although their employment may have enhanced their nursing abilities, the services they provided were not part of any educational plan. The hospital, therefore, has not shown that this employment was incidental to them education.

IV.

For the above stated reasons, we AFFIRM the decision of the Honorable Thomas G. Hull, United States District Judge for the Eastern District of Tennessee, for the reasons set forth in his February 7, 1992 order.

1 . In 1982, there were a total of 288 hospital school nursing programs, and 1,144 collegiate nursing programs. American Nursing at 704.