United States v. Memorial Sloan-Kettering Cancer Center

07-0926-cv(L) & 07-0949-cv(Con)
United States of America v. Memorial Sloan-Kettering Cancer Center
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
_____________________
August Term, 2007
(Argued: July 8, 2008 Decided: March 25, 2009)
Docket Nos. 07-0926-cv(L), 07-0949-cv(Con)
_____________________
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.
_______________________
These two cases, Albany Medical Center v. United States (“AMC”) and United States v.
Memorial Sloan-Kettering Cancer Center (“Sloan-Kettering”), 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 United States
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 the respective district courts for further proceedings consistent with this opinion.
_______________________
MARK H. CHURCHILL, McDermott Will & Emery LLP, Washington, D.C. (Joel E.
Cohen, McDermott Will & Emery LLP, New York, New York, Christopher
Kliefoth, Sarah E. Hancur, McDermott Will & Emery LLP, Washington, D.C., on
the brief), for Plaintiff-Appellant Albany Medical Center.
MARK H. CHURCHILL, McDermott Will & Emery LLP, Washington, D.C.
(Christopher Kliefoth, Teresa M. Goody, McDermott Will & Emery LLP,
Washington, D.C., Joel E. Cohen, McDermott Will & Emery LLP, New York,
New York, on the brief), for Defendant-Appellant Memorial Sloan-Kettering
Cancer Center.
TERESA E. MCLAUGHLIN , Attorney, Tax Division, Department of Justice,
Washington, D.C. (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, D.C., 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.
2
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, New York, 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”) (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 Honorable David G. Trager, of the United States District Court for the Eastern
District of New York, sitting by designation.
3
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.
BACKGROUND 1
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
1
Most of the facts are not in dispute, and those facts that are in dispute are noted.
4
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.
5
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
6
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 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 interpreted as including residents,
7
the intern exception would have been redundant from the start. Wary of interpreting the statute
in a manner that rendered some of its language surplusage, the district court ruled that medical
interns (and therefore medical residents) had never been eligible for the student exception.
Based on its finding that residents were ineligible for the student exception as a matter of
law, the district court granted summary judgment to the Government.
C. Memorial Sloan-Kettering Cancer Center v. United States
The Cancer Center also filed a refund application with the IRS. The Cancer Center
premised its request for a refund on two assertions. First, it claimed that the monies that it paid
to residents were “scholarships” under the statute and therefore not subject to FICA. Second, it
argued that residents were eligible for the student exception to FICA. The IRS granted the
application and refunded FICA taxes that the Cancer Center had paid between 2001 and 2003.
On January 3, 2006, the Government reversed its position and sued to recover the
refunded FICA taxes. Ten months later, the Government moved for summary judgment, arguing
that (1) the monies paid by the Cancer Center to residents were not scholarships, because
residents are required to perform services in exchange for the funds, and (2) residents are
ineligible for the student exception as a matter of law. With respect to the Cancer Center’s
scholarship claim, the Government argued that the Cancer Center’s residency contracts require
its residents to provide patient care services, and thus the monies paid by the Cancer Center to
residents could not be considered “scholarships.”
The district court (Hellerstein, J.) issued an oral decision. At the start of the hearing, the
court expressed some skepticism of the Cancer Center’s assertion that it did not benefit from the
8
patient care services provided by residents. The court noted that, during the early years of their
careers, professionals often learn more from their employment positions than they contribute in
those positions, but the court also told the Cancer Center’s counsel that “[y]ou can’t say the
hospital doesn’t benefit from the residents.” When counsel responded that the Cancer Center did
not bill patients for care provided by residents, the district court asked whether the cost of the
resident services might be built into the cost of other hospital fees and stated that the Cancer
Center had no way to prove otherwise. Unlike scholarships, the court noted that to receive these
monies, “[t]here’s no needs test” or any other “set of considerations that are customary for award
of scholarships.”
After extensive questioning by the court and lengthy arguments by both sides, the district
court held that “the government is entitled to summary judgment and that FICA was payable on
the compensation paid to residents and other fellows . . ..” In so doing, the court first ruled that
the monies paid to residents were not scholarships because residents were required to provide
patient care services in return for the funds. Moving on to the student exception, the court held
that residents were not students and could not invoke the student exception. Though it noted, in
passing, that “by reason of the contract drawn up with a resident, the residents are not students,”
it focused on the legislative history and found that Congress had intended FICA to apply to
residents. “The amounts paid to them for the purpose of the act are considered compensation.
The fact that they have another motive as well is beside the point . . ..” The court, therefore,
granted summary judgment to the Government.
9
DISCUSSION
We review “a grant of summary judgment de novo.” Rubens v. Mason, 527 F.3d 252,
254 (2d Cir. 2008).
I. The Student Exception
A. The Statutory and Regulatory Text
FICA imposes payroll taxes on “wages,” which it defines as “remuneration for
employment,” with certain exceptions. 26 U.S.C. § 3121(a). The student exception excludes
from the definition of “employment” any “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.” 26 U.S.C. § 3121(b)(10). At the time of
the events at issue in these cases,2 the implementing regulations stated that “[t]he term ‘school,
2
On December 21, 2004, the IRS issued an amended version of the student exception
regulation that restricted its availability and more specifically limited its applicability to medical
residents. Student FICA Exception, 69 Fed. Reg. 76404 (Dec. 21, 2004) (to be codified at 26
C.F.R. Pt. 31). The amendment imposed new requirements for institutions claiming to be
“schools,” and in the course of doing so it rejected commentary in favor of considering teaching
hospitals to be schools. Id. at 76405.
The new regulation includes a list of examples, and one of those examples addresses
whether medical residents are eligible for the student exception. The example describes a
situation that would likely include the residency programs at issue here:
Employee E is employed by University V to provide patient care services at a teaching
hospital . . . . as part of a medical residency program . . . . The residency program . . . is
accredited by the Accreditation Counsel for Graduate Medical Education. Upon
completion of the program, E will receive a certificate of completion, and be eligible to
sit for an examination required to be certified by a recognized organization in the medical
specialty. E’s normal work schedule, which includes services having an educational,
instructional, or training aspect, is 40 hours or more per week.
26 C.F.R. § 31.3121(b)(10)-2(e)(4)(I) (2004).
The regulation unambiguously makes clear that residents enrolled in such a program
would not be considered students:
10
college, or university’ . . . is to be taken in its commonly or generally accepted sense.” 26 C.F.R.
§ 31.3121(b)(10)-2(d). The regulation further stated that whether an individual was a student
depended on “the basis of the relationship of such employee with the organization for which the
services are performed”:
An employee who performs services in the employ of a school, college, or
university, as an incident to and for the purpose of pursuing a course of study at
such school, college, or university has the status of a student in the performance of
such services.
Id. § 31.3121(b)(10)-2(c). “[T]he amount of remuneration for services performed by the
employee . . . , the type of services performed by the employee, and the place where the services
are performed are immaterial.” Id. § 31.3121(b)(10)-2(b). Instead, eligibility for the exception
depends on “(1) the character of the organization . . . as a school, college, or university . . . , and
(2) the status of the employee as a student enrolled and regularly attending classes . . . .” Id.
B. Textual Ambiguity
Both district courts found this statutory and regulatory framework ambiguous as to
whether medical residents can apply for the student exception, and both courts consequently
In this example, E is employed by V, a school, college, or university within the meaning
of paragraph (c) of this section. However, E’s normal work schedule calls for E to
perform services 40 or more hours per week. E is therefore a full-time employee, and the
fact that some of E’s services have an educational, instructional, or training aspect does
not affect that conclusion. . . . Accordingly, E’s services are not excepted from
employment under section 3121(b)(10) and there is no need to consider other relevant
factors, such as whether E is a professional employee or whether E is eligible for
employment benefits.
Id. § 31.3121(b)(10)-2(e)(4)(ii).
Because the regulation applies only “to services performed on or after April 1, 2005,” id.
§ 31.3121(b)(10)-2(f), however, we do not apply it or consider it here.
11
relied on the legislative history of the student exception to find that medical residents are
categorically ineligible. The first question we face, therefore, is whether the statute is ambiguous
with respect to medical residents’ eligibility for the exception, for “[o]nly if we discern ambiguity
do we resort . . . to canons of statutory construction . . . [and] to legislative history,” Daniel v.
Am. Bd. of Emergency Med., 428 F.3d 408, 423 (2d Cir. 2005) (citations omitted).
The Hospitals argue that the student exception is not ambiguous, as it clearly establishes
that students who work for the educational institutions they attend are exempt from FICA. They
point out that the language of the student exception consists of “basic, easily understood words,”
and they contend that whether medical residents are “students” is therefore a question of fact
rather than a question of law. The Government first responds that if the term “student” has an
unambiguous meaning, that meaning does not encompass residents, who are not “students” as
that term is generally used. The Government believes the statute is ambiguous, however,
because it does not detail the circumstances that make an individual a student and does not, on its
face, answer the question of whether medical residents are students.
In United States v. Mount Sinai Medical Center of Florida, 486 F.3d 1248 (11th Cir.
2007), the Eleventh Circuit addressed the same question. There, the district court had looked to
legislative history and concluded that medical residents were categorically ineligible for the
student exception. Id. at 1251. The Eleventh Circuit held that the district court had erred when it
“relied on legislative history without first determining whether the language of the statute was
ambiguous.” Id. The court found that the statutory meaning was “plain” and that “[w]hether a
medical resident is a ‘student’ and whether he is employed by a ‘school, college, or university’
are separate factual inquiries that depend on the nature of the residency program in which the
12
medical residents participate and the status of the employer.”3 Id. at 1252. The Eleventh Circuit
refused to “review the legislative history of this statute to create an ambiguity where there is
none.” Id.The Eighth Circuit reached a similar conclusion in Minnesota v. Apfel, 151 F.3d 742 (8th
Cir. 1998), the issuance of which has spurred the current wave of litigation over the status of
medical residents. In Apfel, the Eighth Circuit considered whether medical residents were
exempt from social security taxes under an agreement between Minnesota and the federal
government, the terms of which were governed by a statute containing an identically worded
student exemption to the one at issue here.4 Id. at 747 (discussing student exception provision of
42 U.S.C. § 410(a)(10)). The Eighth Circuit first held that no taxes were due based on the
interpretation of a contract between the Government and the State. Id. Then, however, the court
reviewed the district court’s alternative holding that medical residents fell under the student
exception. Id. The Eighth Circuit rejected the Government’s argument that residents were
categorically ineligible for the exception, holding that eligibility depended on “a case-by-case
3
On remand, the district court found that the residents at Mount Sinai Medical Center
met the definition of “students” and that Mount Sinai qualified as a “school, college, or
university” for purposes of the FICA student exception. United States v. Mount Sinai Med. Ctr.
of Fla., No. 02 Civ. 22715, 2008 U.S. Dist. LEXIS 57808, at *6 (S.D. Fla. July 28, 2008). The
district court observed that Mount Sinai, as a teaching hospital, “plays a vital function in today’s
world of graduate medical education” and that “[n]o other institutions in the United States, other
than teaching hospitals like Mount Sinai, carry out this essential role and function.” Id. The
court also found that the “tipping point” for the student Exemption from FICA taxes is “the
completion of the full residency (or fellow) program . . . at a teaching hospital . . ..” Id. at *7-8.
4
Although the statute analyzed in Apfel pertains to the definition of employment for
purposes of provisions of the social security statute covering benefits, we have no occasion to
address the question of whether our holding with respect to 26 U.S.C. § 3121(b)(10) has any
bearing on eligibility for benefits.
13
examination” to determine whether residents’ relationship with the hospital was “primarily for
educational purposes or primarily to earn a living.” Id. at 748. The court then affirmed the
district court’s finding that the residents fell within the scope of the exception. Id.The Sixth and Seventh Circuits have recently joined the Eleventh and Eighth Circuits in
holding that the student exception is not per se inapplicable to medical residents. Univ. of Chi.
Hosp. v. United States, 545 F.3d 564 (7th Cir. 2008). The Seventh Circuit concluded that the
statute’s silence on the specific issue of whether medical residents qualify for the student
exception did not amount to ambiguity. Id. Thus, it was not persuaded by the Government’s
arguments based “on inferences drawn from statutory and legislative history.” Id. at 567.
Rather, the Seventh Circuit held that even if it were to conclude that the statute was ambiguous,
it would “turn first to the applicable Treasury Regulation,” which “prescribes a case-specific test
for whether the student exception applies” and renders immaterial the “amount the employee is
paid, the type of services performed, and the place where services are performed.” Id. at 568
(citing 26 C.F.R. § 31.3121(b)(10)-2).
Similarly, the Sixth Circuit has concluded that, while the meaning of “student” is a legal
issue, the question of whether particular residents are students is a factual one. United States v.
Detroit Med. Ctr., --- F.3d ---, 2009 WL 465543, at *6 (6th Cir. Feb. 26, 2009). The Sixth
Circuit observed that the “statute does not define ‘student’ but merely specifies where and how
the student must be studying for the exemption to apply.” Id. at *5. The Sixth Circuit looked to
the ordinary meaning of the word “student” and the Treasury regulation, which “says that ‘[a]n
employee who performs services in the employ of a school, college, or university, as an incident
to and for the purpose of pursuing a course of study at such school, college, or university has the
14
status of a student in the performance of such services.’” Id. (quoting 26 C.F.R. §
31.3121(b)(10)-2(c)) (emphasis added in Detroit Med. Ctr.). Thus, to determine whether the
residents were students, the court “need[ed] to know what the residents in the program do and
under what circumstances.” Id.We agree with the Sixth, Seventh, and Eleventh Circuits that the statute is unambiguous
and that whether medical residents are “students” and the Hospitals “schools” is a question of
fact, not a question of law. The statute expressly defines which individuals fall within the scope
of the student exception: students who are “enrolled and regularly attending classes.” 26 U.S.C.
§ 3121(b)(10). It also establishes the types of employment that qualify for the student exception:
“service performed in the employ of . . . a school, college, or university.” Id. This language is
not ambiguous, and in their effort to invoke the student exception, the Hospitals do not urge us to
adopt an unusual or strained interpretation of the statutory text. They seek only the opportunity
to prove, through the introduction of evidence, that their residents come within the terms of the
text. The Government’s primary argument is that the fact Congress repealed a separate
exemption for services performed by hospital interns in 1965 demonstrates that Congress did not
believe that medical residents would fall within the scope of the student exception. Like the
Eleventh Circuit, “we [will] not resort to legislative history to cloud a statutory text that is clear.”
Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994); see also Mount Sinai, 486 F.3d at 1252.
Even if we were to find ambiguity in the statute, the method for resolving the ambiguity
is found in the implementing regulations. Those regulations require courts to give the term
“school, college, or university” “its commonly or generally accepted” meaning. 26 C.F.R. §
31.3121(b)(10)-2(d). The regulations further require courts to decide whether an individual is a
15
“student” by examining the unique circumstances surrounding the individual’s relationship with
the school, including “the basis of the relationship of such employee with the [school],” “the
character of the organization . . . as a school, college, or university,” and “the status of the
employee as a student enrolled and regularly attending classes.” Id. § 31.3121(b)(10)-2(c). The
Government does not argue that this regulation conflicts with the legislative history or is
otherwise invalid. In any event, as the Seventh Circuit held, “we need not . . . attempt to
reconcile the statutory and legislative history of the intern exception with the student exception
or the applicable Treasury Regulation,” because “the statute unambiguously does not
categorically exclude medical residents from eligibility for the student exception.” Univ. of Chi.
Hosp., 545 F.3d at 570.
Because the student exception is unambiguous, both district courts erred in ruling that
medical residents are ineligible for the exception as a matter of law. We agree with the Eleventh
Circuit that “[w]hether a medical resident is a ‘student’ and whether he is employed by a ‘school,
college, or university’ are separate factual inquiries that depend on the nature of the residency
program in which the medical residents participate and the status of the employer.” Mount Sinai,
486 F.3d at 1252. Accordingly, both cases must be remanded for “a particularized review of
whether [the Hospitals’] medical residents qualify for the student exclusion.” Univ. of Chi.
Hosp. v. United States, No. 05 Civ. 5120, 2006 U.S. Dist. LEXIS 68695, at *14 (N.D. Ill. Sept. 8,
2006), aff’d 545 F.3d 564 (7th Cir. 2008).
16
C. Legislative History
Although we find the statute unambiguous and rule in favor of the Hospitals on that basis,
we take a moment to address the Government’s claim that if we were to look to the legislative
history, we would rule in favor of the Government.
When Congress first enacted the FICA tax in 1935, it did not include the student
exception or any other relevant exception. 1933 Social Security Act, § 901, 49 Stat. 639 (1935).
In 1939, Congress amended the statute and added the precursor to the student exception. Internal
Revenue Code of 1939, § 1426(b)(13), 53 Stat. 1384-85 (1939). At this time, Congress also
added the intern exception, which excluded from the definition of “employment” “service
performed as an interne [sic] in the employ of a hospital by an individual who has completed a
four years’ course in a medical school chartered or approved pursuant to State law.” Id. at 1385.
The Government argues that the coexistence of the student exception and the intern exception
demonstrates that Congress did not believe that medical interns would fall within the scope of the
student exception, and that, a fortiori, medical residents—who are even further removed from
enrollment in medical school classroom studies—would not fall within the student exception
either. According to the Government, if medical interns and medical residents were eligible for
the student exception, the intern exception would have been surplusage.
Fifteen years after Congress enacted the two exceptions, however, St. Luke’s Hospital in
Cleveland brought a lawsuit claiming that medical residents fell within the intern exception. See
St. Luke’s Hosp. Ass’n of Cleveland, Ohio v. United States, 333 F.2d 157 (6th Cir. 1964). St.
Luke’s argued that its residents were “doctors-in-training” and therefore within the terms of the
intern exception. Id. at 158. Evidence showed that residency programs had expanded since
17
1939. Id. While the term “resident,” in 1939, “referred to a graduate physician, licensed to
practice medicine, who served on the [hospital] staff” and who may or may not have been
undergoing training, residency programs in 1964 were designed “for training of physicians in
specialized branches of medicine leading to examination and certification by specialty boards.”
Id. at 161. Thus, while the term “intern” had come to indicate “graduate doctors,” the term
“resident-in-training” had come to connote individuals “still in training status.” Id.The Sixth Circuit held, however, that residents were ineligible for the intern exception.
Although the distinctions between medical interns and residents had been “substantially
reduced,” the two terms continued to describe two discrete categories of individuals, as they had
when the intern exception was enacted in 1939. Id. at 164. The court acknowledged that
changing circumstances might counsel in favor of expanding the intern exception to include
residents, but it found that “meeting these changed conditions, if indeed there is warrant for
doing so at all, is the function of legislation and not that of judicial interpretation.” Id.The following year, Congress repealed the intern exception altogether. See Social
Security Amendments of 1965, Pub. L. No. 89-97, § 311, 79 Stat. 286, 381. The House Report
stated that extending Social Security coverage to medical interns “would give young doctors an
earlier start in building up social security protection and would help many of them to become
insured under the program at the time when they need the family survivor and disability
protection it provides.” H.R. Rep. No. 89-213 (1965). The Report further states that
The effect of this amendment is to extend [FICA coverage] to such interns unless
their services are excluded under provisions other than section 3121(b)(13). Thus,
the services of an intern are covered if he is employed by a hospital which is not
exempt from income tax as an organization described in section 501(c)(3) of the
code. If the intern is employed by a hospital which is exempt from income tax
18
and which has a waiver certificate in effect under section 3121(k) of the code, he
is not excluded from coverage by section 3121(b)(3)(B) of the code if coverage
was effected under such certificate.
Id.According to the Government, the enactment of the intern exception—which reflects a
determination that interns (and, a fortiori, residents) are ineligible for the student
exception—combined with the repeal of the intern exception—which reflects a determination
that interns (and, a fortiori, residents) should be covered by the FICA tax—demonstrate a
congressional determination that medical residents are ineligible for the student exception.
Thus, if we find the statute ambiguous and look to legislative history, the Government believes
we will find the legislative history to require a ruling in its favor.
We disagree. The Government is correct in pointing out that traditional rules of
construction, such as the expressio unius canon and the rule against surplusage, suggest that in
1939 and 1965, Congress did not believe that medical interns were categorically eligible for the
student exception. But it does not follow that Congress considered medical residents to be
categorically ineligible for that exception. See Mount Sinai, 486 F.3d at 1253 (“The student
exemption relies, in part, on the identities of the employees and employers to define the scope of
the exemption, whereas the intern exemption applied to a type of service. The intern exemption
would have been superfluous only if an intern were always a ‘student’ and a ‘hospital’ were
always a ‘school, college, or university.’ Although all interns may be students, not all hospitals
are schools, colleges, or universities.”). The statement from the House Report accompanying the
repeal of the intern exception “leaves open the possibility that interns might qualify for other
FICA exemptions.” Univ. of Chi. Hosp., 545 F.3d at 569. It states that “[t]he effect of this
19
amendment is to extend coverage under the Federal Insurance Contributions Act to such interns
unless their services are excluded under provisions other than [the intern exception].” H.R. Rep.
No. 89-213, 216 (1965) (emphasis added).
Congress has not defined the term “student” such that a post-graduate doctor could never
be eligible for the exception. As the Eleventh Circuit held, “[t]he student exception was wholly
unaffected by the repeal of the intern exception, and the repeal of the intern exception implied
nothing about whether either interns or residents might bring themselves under the student
exception.” Univ of Chi. Hosp., 545 F.3d 569. We will not infer from a sequence of legislative
events occurring more than forty years ago that Congress intended today’s medical residents to
be categorically ineligible for the student exception.
As the Sixth Circuit noted in St. Luke’s, the nature of medical residency has changed over
time. Between 1939 and 1965, medical residents evolved from members of the hospital staff into
trainees engaged in a prolonged course of study. The Hospitals claim that since then, residents
have become students and medical centers have become schools. In support of that claim, they
have introduced evidence that residency programs are accredited, that the programs have a strong
educational component, and that residency is a prerequisite for medical licensure. Contrary to
the Government’s claims, which focus on the meaning of the statute and an unstated (and
unenacted) congressional intent, these cases are really about the nature of modern residency
programs and the relationships between residents and their hospitals. If those programs are now
schools and if residents are now students, Congress’s failure to anticipate that development does
not bar the hospitals from now applying for such recognition.
20
II. The Cancer Center’s Scholarship Claim
In addition to the student exception, the Cancer Center also invokes the Scholarship
regulation. The Cancer Center relies on regulations interpreting the general definition of “gross
income” under the Tax Code, which provides, in relevant part, that an individual may exclude
from the computation of gross income:
any amount received by an individual as a scholarship or fellowship grant to the
extent the individual establishes that, in accordance with the conditions of the
grant, such amount was used for qualified tuition and related expenses.
26 U.S.C. § 117(b)(1). The statute further provides that the fellowship exemption shall not apply
to “that portion of any amount received which represents payment for teaching, research, or other
services by the student required as a condition for receiving the qualified scholarship or qualified
tuition reduction.” 26 U.S.C. § 117(c)(1). Treasury Department regulations provide that
amounts paid or allowed to, or on behalf of, an individual to enable him to pursue
studies or research are considered to be amounts received as a scholarship or
fellowship grant . . . if the primary purpose of the studies or research is to further
the education and training of the recipient in his individual capacity and the
amount provided by the grantor for such purpose does not represent compensation
or payment for [employment] services . . .. Neither the fact that the recipient is
required to furnish reports of his progress to the grantor, nor the fact that the
results of his studies or research may be of some incidental benefits to the grantor
shall, of itself, be considered to destroy the essential character of such amount as a
scholarship or fellowship grant.
26 C.F.R. § 1.117-4(c)(2). The Supreme Court upheld a prior version of this regulation in
Bingler v. Johnson, 394 U.S. 741 (1969), and in doing so it commented that the regulations were
consistent with “the ordinary understanding of ‘scholarships’ and ‘fellowships’ as relatively
disinterested, ‘no-strings’ educational grants, with no requirement of any substantial quid pro quo
from the recipients.” Id. at 751. In the years following Bingler, “the numerous courts that have
21
considered various aspects of this issue have almost uniformly held that payments made to
medical residents do not qualify for the § 117 exclusion.” Field v. Comm’r, 680 F.2d 510, 513
(7th Cir. 1982) (collecting cases).
In addition to the statute and regulation, the IRS has also ruled in Notice 87-31 that “the
application of FICA or FUTA depends on the nature of the employment and the status of the
organization.” IRS Notice 87-31, 1987-1 C.B. 475. Furthermore, “[w]here a portion of a
scholarship is granted in return for services . . . the grantor must make a good faith allocation,
based on all the facts and circumstances, to determine that portion of the amount that represents
compensation for services provided by the recipient.” Id. “Only those amounts allocated to
compensation for services provided by the recipient are subject to the reporting and withholding
requirements described in this paragraph.”
In support of its motion for summary judgment, the Government focused on whether the
residents received the funds as a scholarship, arguing that they did not because their receipt of the
funds is conditioned on the requirement that the residents provide patient care services. For
support, it relied on the appointment letter that the Cancer Center sent to residents when they
were chosen for the residency program. The letter describes the residents’ responsibilities as
follows:
It is expected as a member of the graduate staff of Memorial Hospital for Cancer and
Allied Diseases you will develop a personal program of self-study and professional
growth with guidance from teaching staff of the Hospital; participate in safe, effective
and compassionate patient care under supervision as determined by the Chief of Service
or his/her designee commensurate with your level of advancement and responsibility;
participate fully in the educational activities of your program and, as required, assume
responsibility for teaching and supervising other residents and students; participate in the
evaluation of the quality of education provided by the Program; participate in institutional
programs and activities involving the Hospital medical staff and institutional committees
22
and councils, especially those that relate to quality assurance and patient care review
activities; apply cost containment measures in the provision of patient care; and adhere to
the rules and regulations, Bylaws, and policy and procedures of the institution. Memorial
Hospital for Cancer and Allied Diseases agrees to provide a suitable environment for
medical education and training in accordance with established standards.
Appendix at A-228, United States v. Mem’l Sloan-Kettering Cancer Ctr., No. 07-0926-cv (2d
Cir. May 23, 2007) (emphasis added).
Based on this language, the Government contended that the entirety of the monies paid to
residents are given conditionally and that the Cancer Center’s residents receive none of their
funds unless they provide patient care services. In response to the Hospitals’ assertion that the
residents care for patients solely in order to learn how to practice medicine, the Government
pointed out that many professionals learn their profession through on-the-job training. The
Cancer Center disagreed with this characterization of the services that residents provide. It
argued that “[i]n the agreement it doesn’t say patient care services, it says experience[] patient
care, much like they have to experience grand rounds, much like they have to experience
everything else in the agreement.” The district court agreed with the Government, finding that
“the argument is overpowering that . . . the payments qualify in whole for FICA treatment.”
We find no error in the district court’s ruling on this point. Any reasonable fact finder
reading the appointment letter would understand it to require that residents provide patient care
services as a condition of receiving funds from the Cancer Center. The Cancer Center does not
seriously dispute that residents must provide patient care. It emphasizes that the purpose of
requiring that the resident provide that care is educational. Nonetheless, we agree with the
Government that the educational purpose of the service requirement does not change the way in
which the requirement exacts a “substantial quid pro quo” from the residents, and cannot be
23
characterized as a “relatively disinterested, ‘no strings’” arrangement. Bingler, 394 U.S. at 749-
50. Although the Cancer Center argues that the district court should have inquired into which
portion of the residents’ compensation was conditioned on patient care and which part was not,
the agreement between the resident and the Cancer Center does not separate the compensation
amount into two groups, those that are conditional and those that are not. The agreement
imposes the patient care requirement as a condition on the resident’s status as a resident, and thus
as a condition on the entirety of the compensation provided therefor. And because it appears that
the Cancer Center’s “resident education and patient care services are inextricably intertwined” “it
is unclear if any allocation would be possible.” United States v. Partners Healthcare Sys., Inc.,
Civ. No. 05-11576, 2006 WL 6087284, at *7-8 (D. Mass. Sept. 30, 2008). The district court
properly refused to engage in a further inquiry into which portion was conditional.
III. Conclusion
We VACATE the judgments of both district courts insofar as they ruled that medical
residents are ineligible for the student exception as a matter of law. We AFFIRM the judgment
of the United States District Court for the Southern District of New York insofar as it ruled that
the monies paid by the Cancer Center to its medical residents are not scholarships. We
REMAND both cases for further proceedings consistent with this opinion.
24
TRAGER, District Judge, concurring in part and dissenting in part:
Although I agree that payments made to residents cannot qualify as scholarships, I
respectfully dissent from the panel's construction of the student exception from FICA taxes. My
colleagues find that the text of 26 U.S.C. § 3121(b)(10) unambiguously adopts a case-by-case
approach for determining whether a medical resident qualifies for the student exception. Unlike
my colleagues, I find the statutory text ambiguous and resort to legislative history appropriate.
And here Congress unambiguously expressed its intent that residents are categorically ineligible
for the student exception when it repealed the related FICA tax exception for interns in 1965 (the
"intern exception" and the "1965 amendment").1 Indeed, between the 1965 amendment and the
Eighth Circuit's decision in Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998), a period of almost
33 years, Congress's intent to make residents categorically ineligible for the student exception
appears to have been clearly understood by all relevant parties.
26 U.S.C. § 3121(b)(10) - which defines the student exception - uses extremely general
language. The relevant portion exempts from FICA taxation any remuneration for a "service
performed in the employ of ... a school, college, or university ... if such service is performed by a
1
Moreover, even accepting the claim that the statutory language was unambiguous, the
chronology or contextual history of the repeal of the intern exception and its relationship to the
student exception, apart from any other sources of legislative history, would be decisive for me.
However, I find it unnecessary to rely on this principle in view of its unresolved and contested
status. Compare Cohen, 498 F.3d at 116 ("if [the statutory text] is unambiguous, no further
inquiry is necessary.") with United States v. Turkette, 452 U.S. 576, 580 (1981) ("If the statutory
language is unambiguous, in the absence of a clearly expressed legislative intent to the contrary,
that language must ordinarily be regarded as conclusive.") (emphasis added, quotation omitted)
and United Steelworkers of America v. Weber, 443 U.S. 193, 201 (1979) ("In this context
respondent's reliance upon a literal construction . . . is misplaced. It is a familiar rule that a thing
may be within the letter of the statute and yet not within the statute, because not within its spirit
nor within the intention of its makers.") (quotation omitted).
25
student who is enrolled and regularly attending classes at such school, college, or
university . . . ." 26 U.S.C. § 3121(b)(10). The text is ambiguous in that it does not clearly
define either the term "student" or the term "school, college, or university." The fact that the
statute uses terms that are plain and simple at first glance does not make it unambiguous.
Instead, we must focus on the specific question before the court and determine whether the text,
standing alone, allows for more than one reasonable interpretation. Whether a statute is
ambiguous depends on whether it has an "unambiguous meaning with regard to the particular
dispute in the case." Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997). To be unambiguous,
a statute must supply "rule of decision fine-grained enough so that it controls the 'precise
question' at issue . . . ." General Elec. Co. v. Comm'r of Internal Revenue, 245 F.3d 149, 154 (2d
Cir. 2001) (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 843 n.9 (1984)).
The question directly posed by the parties is whether medical residents are categorically
ineligible for the student exception or whether eligibility should be judged on a case-by-case
basis. This question requires us to determine not merely how the statute treats residents but also
at what level of generality eligibility for the exception is decided. Conceptually, at least, the
statute could judge putative students (1) categorically, such that all residents are treated alike; (2)
by program, such that all residents in a particular program are treated alike; or (3) as individuals,
such that two individuals in the same program might receive different treatment depending on
their individual circumstances.
The bare text of the statute does not unambiguously resolve the matter. The text itself
says little about at what level of generality eligibility should be determined. It is so spare that it
26
does not even enumerate the criteria to use in determining whether a person is a "student" or
what institutions can be called a "school, college, or university," let alone specify at what level of
generality this decision is to be made. See 26 U.S.C. § 3121(b)(10). As the majority notes, the
statute does provide some guidance in that it specifies that only students who are "regularly
attending classes" may qualify and that they must work for a "school, college, or university . . . ."
Maj. Op. at 16. But the fact that the statute provides some limited guidance as to who qualifies is
not the same thing as specifying at what level of generality the definition is to be applied.
Nor does logic provide an obvious gloss on the language that eliminates the ambiguity.
Considering the case of residents, on the one hand, a case-by-case resolution make sense as
residency programs likely vary in their nature. On the other hand, categorically resolving the
matter in favor of ineligibility might also make sense because all residents have earned their
medical degrees before commencing their residencies and all have patient care responsibilities
that are substantial, to say the least. Moreover, a categorical resolution would ensure equity
among residents. As noted above, to qualify for the student exception, an individual must work
for a "school, college, or university . . . ." 26 U.S.C. § 3121(b)(10). A case-by-case resolution
might therefore grant an exception to a resident who happened to work for a hospital that is part
of a university or medical school but deny it to one who happened to work for a standalone
hospital - despite the fact that the two programs were similar in all other relevant respects. A
categorical resolution, however, would treat them equally.
Policy considerations also don’t furnish a clear answer. On the one hand, a case-by-case
approach might maximize fairness in particular situations. On the other hand, a categorical
approach might reduce administrative costs and provide certainty. See United States of America
27
v. Mount Sinai Medical Center of Florida, 353 F. Supp. 2d 1217, 1229-30 (S.D. Fla. 2005)
(arguing that it would be a waste of resources to litigate student exception claims by residents
because of the huge volume of cases and their highly repetitive facts), rev'd, 486 F.3d 1248 (11th
Cir. 2007). Given the presence of plausible arguments for different interpretations, the text could
reasonably be interpreted in more than one fashion. Because of the ambiguity of the bare text,
resort to legislative history is proper to determine Congress’s intent. Cohen v. JP Morgan Chase
& Co., 498 F.3d 111, 116 (2d Cir. 2007).
Here, legislative history eliminates any ambiguity left by the bare text, making it clear
beyond any "reasonable doubt" that Congress intended that residents would be subject to FICA
taxation. Cohen, 498 F.3d at 122 (quotation omitted). By "legislative history," I do not mean
merely committee reports and floor statements. As has often been noted, these are not always an
ideal guide to congressional intent. See, e.g., Wisconsin Pub. Intervenor v. Mortier, 501 U.S.
597, 620-22 (1991) (Scalia, J., concurring). Rather, my view is based principally on the
contextual history of laws that Congress passed regarding FICA tax exemptions. This sequence
of laws so clearly revealed Congress's purpose that, for more than three decades after the 1965
amendment, all the relevant parties appear to have understood that residents were categorically
ineligible for the student exception. See Albany Medical Center, 2007 WL 119415, at *1 n.1.
Stated more specifically, the legislative history directly indicates that interns are subject
to FICA taxation and the coverage of residents under the FICA tax regime follows inexorably
from the coverage of interns. In 1939, Congress passed two relevant exemptions to FICA
taxation: the original version of the student exception and the intern exception. Social Security
Act Amendments of 1939, Pub. L. No. 76-379, ch. 666, 53 Stat. 1385 (1939). In the years
28
leading up to 1964, a growing number of medical residents claimed that they should be exempt
from FICA taxation under the intern exception because the functional distinctions between
interns and residents had eroded. The Sixth Circuit rejected this argument, holding that any
expansion of the intern exception was for Congress, not the courts to create. St. Luke's Hosp.
Assoc. v. United States, 333 F.2d 157, 164 (6th Cir. 1964). In 1965 - rather than expand the
intern exception to cover residents - Congress instead chose to eliminate the intern exception
entirely. Social Security Act Amendments of 1965, Pub. L. No. 89-97 § 311, 79 Stat. 380-81
(1965).
The House and Senate reports, though not essential to determining congressional intent,
are nonetheless worth reviewing. The House Report for the 1965 amendment repealing the
intern exception indicated that:
Coverage would also be extended to services performed by medical . . . interns. The
coverage of services as an intern would give young doctors an earlier start in building up
social security protection and would help many of them to become insured under the
program at a time when they need the family survivor and disability protection it
provides. This protection is important for doctors of medicine who, like members of other
professions, in the early years of their practice, may not otherwise have the means to
provide adequate survivorship and disability protection for themselves and their families
Social Security Amendments of 1965, H.R. Rep. No. 89-213, 89th Cong. 1st Sess. 95,
reprinted in 1965-2 C.B. 733, 735 (1965). Similarly, the Senate report for the bill repealing the
intern exception noted that "[c]overage would also be extended to services performed by medical
. . . interns." Social Security Amendments of 1965, S. Rep. No. 89-404 (1965), reprinted in
1965-2 C.B. 758, 759 (1965).
Taken together, the contextual history and legislative purpose establish Congress's clear
intent to cover residents under the FICA regime. See Albany Medical Center v. United States,
29
No. 1:04-CV-1399 (FJS/RFT), 2007 WL 119415, at *2-5 (N.D.N.Y. Jan. 10, 2007) (discussing
the legislative history of the student exception somewhat more fully). The fact that Congress
passed both the intern exception and the student exception at the same time suggests that
Congress did not intend interns to fall under the student exception. Moreover, the fact that
Congress repealed the exception for interns in 1965 indicates that Congress intended for interns
to be subject to FICA taxes. The repeal of the intern exception is sufficient on its own to
demonstrate this intent to secure coverage and the House and Senate reports indicating that
interns are covered adds further confirmation.
If Congress intended to include interns in the FICA tax regime in 1965, that same intent
extends to the coverage of residents. The distinction between interns and residents which the St.
Luke's opinion found blurred in 1964 has further eroded since the 1965 amendment; but residents
are at least as far removed from medical school as those known as interns in 1965.2 Therefore, if
interns categorically are not covered, neither are residents. At a more general level, Congress's
objective in repealing the intern exception in 1965 is clear: to secure social insurance coverage
for doctors who are early in their careers. The repeal of the intern exception in 1965 cannot have
meant anything else and the language of the House Report noting Congress's objective to ensure
coverage for "young doctors" underscores this point. See Social Security Amendments of 1965,
H.R. Rep. No. 89-213, 89th Cong. 1st Sess. 95, reprinted in 1965-2 C.B. 733, 735 (1965).
Allowing residents to apply for the student exception would thwart Congress's clear objective of
ensuring that young doctors receive the social insurance coverage funded by FICA. Indeed, to
ignore this historical context is to say that Congress engaged in a fruitless act when it repealed
2
See the discussion in Albany Medical Center, 2007 WL 119415, at *3 n.2.
30
the exemptions for medical interns in 1965, although no one appears to have thought so until
inventive lawyering discovered § 3121(b)(10) some thirty years later.3
Nor should we be concerned that Congress's intent might be different today from what it
was in 1965 in light of the evolving development of resident programs. This is a matter on
which Congress should speak if it wishes to alter its previously stated and unequivocal goal of
providing coverage for young doctors and their families. Moreover, in these difficult times,
while one can appreciate the financial pressures hospitals face and their desire to reduce costs,
there are substantial policy issues of equity among residents and between and among hospitals
that Congress is the body to consider before courts adopt a case-by-case approach as urged by
appellants here. I am aware that other circuit courts have reached a different conclusion and I do
not take their decisions lightly. However, Congress has spoken directly to the issue at hand.
The majority alternatively relies on regulations which the Treasury Department issued
regarding the application of the student exception. This argument must be addressed under the
under the framework of Chevron. See McNamee v. Dep't. of the Treasury, 488 F.3d 100, 105
(2d Cir. 2007) (applying Chevron to a treasury regulation and provisions of the Internal Revenue
Code).4 The result would be the same. The Chevron framework has two steps. "First, always, is
3
The current wave of litigation regarding residents’ exemption was apparently touched off
by the Eighth Circuit’s decision in Apfel. See Albany Medical Center, 2007 WL 119415, at *1
n.1.
4
There is some controversy over whether Treasury Regulations are analyzed under
Chevron deference or under the standard elucidated by the Supreme Court in National Muffler
Dealers Ass'n, Inc. v. United States, 440 U.S. 472, 477 (1979). See Swallows Holding, Ltd. v.
Comm'r of Internal Revenue., 515 F.3d 162, 167 (3d Cir. 2008). The better view is that Treasury
Regulations are analyzed under Chevron. See McNamee, 488 F.3d at 105 (applying Chevron);
Cinema '84 v. Comm'r of Internal Revenue., 294 F.3d 432, 439 (2002) (applying Chevron); see
also Swallows, 515 F.3d at 168 n.6 (discussing McNamee). Despite this, the Second Circuit has
31
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 . . . ." Chevron, 467 U.S. at 842. Second, "[i]f
... the court determines Congress has not directly addressed the precise question at issue, .... the
question for the court is whether the agency's answer is based on a permissible construction of
the statute." Id. at 843.
At step one of the Chevron framework, the court must initially focus on the language of
the statute to determine whether Congress has directly spoken to the question at issue. Cohen,
498 F.3d at 116. A court may consider the context of the statute as a whole in determining
whether a given provision is ambiguous. FDA v. Brown & Williamson Tobacco Corp., 529 U.S.
120, 132-33 (2000). If the text of the statute is unambiguous with respect to that issue, then the
matter is settled. Cohen, 498 F.3d at 116. Should the text prove to be ambiguous, the
preponderance of authority indicates that legislative history may be considered at step one of the
Chevron framework - before turning to the regulations. The Second Circuit did precisely this in
expressed uncertainty over the question of which standard governs as recently as 2001. General
Elec. Co. v. Comm'r of Internal Revenue, 245 F.3d 149, 154 n.8 (2d Cir. 2001). Moreover,
McNamee cites - but does not apply - both National Muffler and Cottage Sav. Ass'n v. Comm'r
of Internal Revenue, 499 U.S. 554, 560 (1991), a tax case that relies on National Muffler. See
McNamee, 488 F.3d at 106.
It is worth noting, however, that the result would be the same whether Chevron or
National Muffler is applied. National Muffler does not explicitly have the same two step
structure as Chevron; rather National Muffler dictates deference when the regulation
"implement[s] the congressional mandate in some reasonable manner" and focuses on a list of
specific factors. National Muffler, 440 U.S. 472, 476-77 (1979) (quotation omitted).
Unsurprisingly, therefore, analysis under National Muffler is also sensitive to legislative history.
See Allen Oil Co., Inc. v. Comm'r of Internal Revenue, 614 F.2d 336, 339, 340-41 (2d Cir.
1980). In view of the clear inference from the chronology and purpose of the student exception,
no regulation allowing residents to apply for the student exception could stand under National
Muffler. Moreover, as discussed more fully below, the relevant regulation does not even clearly
allow such applications. See 26 C.F.R. § 31.3121(b)(10)-2 (2003).
32
Cohen. Id. at 122-25. Indeed, the language of Chevron implies an inquiry at step one that
reaches beyond the bare text of the statute. It describes the purpose of step one as being to
determine "the intent of Congress . . . ." Chevron, 467 U.S. at 842 (emphasis added). It is
therefore unsurprising that the Supreme Court has recently and frequently considered legislative
history at step one of Chevron. See Gen. Dynamics Land Sys. v. Cline, 540 U.S. 581, 587-90,
600 (2004); Brown, 529 U.S. at 133, 147-48, 150, 154-57; Pension Ben. Guar. Corp. v. LTV
Corp., 496 U.S. 633, 649-50 (1990).5 Accordingly, if, as I believe, the bare text is ambiguous
5
In Gen. Dynamics, the Court extensively considered legislative history before concluding
that the Age Discrimination Employment Act clearly did not prohibit discrimination in favor of
older workers. 450 U.S. at 587-90, 600. The Court held that, even if the agency's interpretation
would otherwise have been eligible for deference under Chevron, the clarity of the statute meant
that such deference did not apply. Id. at 600. In Brown & Williamson, the Court considered
whether the Food, Drug and Cosmetic Act (“FDCA”) allowed the Food and Drug Administration
to regulate cigarettes. At Chevron step one, the Court considered acts passed subsequent to the
FDCA, proposed legislation that was not passed and statements made by agencies, officials and
legislators at the time that relevant legislation was being considered. Brown & Williamson, 529
U.S. at 133-57. In so doing, the Court blended a consideration of the statutory scheme as a whole
with a consideration of legislative history. See id. In LTV Corp., the Court considered
legislative history at Chevron step one but found that it did not clearly indicate congressional
intent. LTV Corp., 496 U.S. at 649-50. To be sure, the Supreme Court has not always
considered legislative history at Chevron step one - though it does not appear that the Court has
ever explicitly ruled out such consideration. See, e.g., National Cable & Telecommunications
Ass'n v. Brand X Internet Services, 545 U.S. 967, 986 (2005); National R.R. Passenger Corp. v.
Boston & Maine Corp., 503 U.S. 407, 417-18 (1992); but see K Mart Corp. v. Cartier, Inc.,
486 U.S. 281, 293 n.4 (1988) (opinion of Kennedy, J.) (writing only for himself and Justice
White and stating that, for purposes of resolving a statutory textual ambiguity prior to turning to
agency regulations, "any reference to legislative history, is in the first instance irrelevant.").
The Second Circuit considered legislative history at Chevron step one in Cohen. 498
F.3d at 122-24. However, there are some Second Circuit cases predating Cohen which express
uncertainty regarding whether legislative history may be considered at step one. See, e.g., Sash
v. Zenk, 428 F.3d 132, 137-38 (2d Cir. 2005); Coke v. Long Island Care At Home, Ltd., 376 F.3d
118, 127 & n. 3 (2d Cir. 2004), rev'd on other grounds 127 S.Ct. 2339, 2347-49 (2007); see also
United States v. Geiser, 527 F.3d 288, 292 (3d Cir. 2008) (holding that legislative history may
not be considered at Chevron step one). Nonetheless, in view of the Second Circuit's recent
decision in Cohen and the Supreme Court's practice in Gen. Dynamics, Brown & Williamson and
LTV Corp., such consideration seems proper in this case, particularly because the legislative
33
and the legislative history is conclusive, consideration of the relevant regulations is unnecessary
and step two of the Chevron framework is never reached, cf. Chevron, 467 U.S. at 842-43;
Cohen, 498 F.3d at 116, although the regulations in effect at the time would but have added only
another layer of ambiguity.6
For the foregoing reasons, I respectfully concur in part and dissent in part.
history clearly establishes that Congress spoke the issue at hand for the reasons discussed above.
6
The significant portions of the relevant regulations are closely patterned on the statutory
text. See 26 C.F.R. § 31.3121(b)(10)-2 (2003). Though the regulation contains additional
language, it does not resolve the issue presented here. For example, the regulation notes that
"[t]he term 'school, college, or university' ... is to be taken in its commonly or generally accepted
sense." 26 C.F.R. § 31.3121(b)(10)-2(d) (2003). Thus, the regulation's language adds little to the
discussion. In addition the regulation notes that, to determine whether an individual is a student,
one must examine the "basis of the relationship of such employee with the [school]" and that an
individual is considered a student when they "perform[] services ... as an incident to and for the
purpose of pursuing a course of study...." 26 C.F.R. § 31.3121(b)(10)-2(c) (2003). These
elements defining the term "student" could as easily be applied on a categorical basis, a program-
by-program basis or an individual basis. None of these three interpretations would be
unreasonable and therefore the regulation does not resolve the ambiguity.
Even if the regulation were clear, the historical context discussed above would, in my
view, lead to the same result. Given the clarity of Congress's intent, no regulation allowing
residents to apply for FICA coverage would qualify as a permissible interpretation of the statute.
See Texas v. United States, 497 F.3d 491, 506 (5th Cir. 2007) (finding, in the alternative, that
even if a regulation could survive Chevron step one, it was unreasonable in light of congressional
intent).
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