United States v. Detroit Med Ctr

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0072p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellee, -
UNITED STATES OF AMERICA,
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-
No. 07-1602
v.
,
>
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Defendant-Appellant. -
DETROIT MEDICAL CENTER,
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Appeal from the United States District Court
for the Eastern District of Michigan at Detroit.
No. 05-71722—Arthur J. Tarnow, District Judge.
Argued: April 30, 2008
Decided and Filed: February 26, 2009
*
Before: BATCHELDER, SUTTON, and FRIEDMAN, Circuit Judges.
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COUNSEL
ARGUED: Charles N. Raimi, DETROIT MEDICAL CENTER, Detroit, Michigan, for
Appellant. Teresa E. McLaughlin, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. ON BRIEF: Charles N. Raimi, DETROIT MEDICAL
CENTER, Detroit, Michigan, Dennis M. Haffey, DYKEMA GOSSETT, Bloomfield
Hills, Michigan, for Appellant. Teresa E. McLaughlin, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. Ted T. Martin,
BAKER & HOSTETLER, Cincinnati, Ohio, for Amici Curiae.
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OPINION
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FRIEDMAN, Circuit Judge. The ultimate question in this case is whether the
Social Security Act covers physicians participating as medical residents in a graduate
*
The Honorable Daniel M. Friedman, Senior Circuit Judge of the United States Court of Appeals
for the Federal Circuit, sitting by designation.
1
No. 07-1602 United States v. Detroit Medical Center Page 2
training program conducted by a hospital group jointly with a university. The issue
arises in a suit by the United States against the hospital group to collect social security
taxes under the Federal Insurance Contributions Act (“FICA”) on the stipends the
hospital group pays to the residents. The district court granted summary judgment for
the United States, ruling (1) that the stipends were wages and not scholarships or
fellowships, and therefore not exempt from income tax, and (2) that the residents did not
qualify for the exemption from social security tax for “students.” We affirm in part,
vacate in part and remand the case to the district court for further proceedings.
I
The appellant, Detroit Medical Center (“Detroit Medical”), operates seven
hospitals in the Detroit metropolitan area. It sponsors a graduate medical training and
education program jointly with Wayne State University (“Wayne State”). This program
provides training to medical residents in numerous areas of medicine. In Michigan, two
years of post-graduate medical training are required before a doctor can take a state
medical board examination.
Each resident signs a Residency Agreement that contractually sets forth the
duties and responsibilities of Detroit Medical, Wayne State, and the resident. The
resident agrees, among other things, to “provide care commensurate with his or her level
of advancement and general competence” and to “assume responsibility for teaching and
supervising other residents or students.” Detroit Medical gives the resident an annual
stipend of slightly more than $40,000 and also agrees to provide “living quarters” for
residents on call, meals to “on-call resident[s] required to spend the night” and liability
insurance. Detroit Medical receives funding for its residency program from Medicare,
Medicaid and Blue Cross. It does not charge patients for the care the residents provide.
The residents are supervised by a large number of physicians who are on the
Wayne State faculty. The program is conducted in conformity with the standards
promulgated by the Accrediting Council for Graduate Medical Education.
No. 07-1602 United States v. Detroit Medical Center Page 3
In its federal returns for 1995 to 2003, Detroit Medical paid social security taxes
on its medical residents’ stipends. In 2004, Detroit Medical sought a refund of the taxes
it paid for three quarters of 2003, which the United States granted. On further review,
however, the government concluded that the refunds had been erroneous. The United
States sued Detroit Medical in the United States District Court for the Eastern District
of Michigan to recover those refunds totaling more than $15 million. Detroit Medical
counterclaimed for the social security taxes on the stipends it had paid for 1995 through
1997 and 2002 and 2003.
In a 30-page opinion, the district court granted the government’s motion for
summary judgment, awarded the government the amounts it had refunded, and dismissed
Detroit Medical’s counterclaim.
The court first held that the stipends paid to the residents were “wages,” not
“scholarships” or “fellowships” that allegedly are not subject to social security taxes.
The court stated that “the residents’ stipends are given as a substantial quid pro quo for
patient care” because “residents are contractually required to perform valuable patient
care services.” It also ruled that because the stipends are an “all or nothing proposition,”
i.e., residents are required to care for patients in order to receive the stipends, no portions
of them could be excluded from taxation as attributable to the time spent in actions other
than patient care.
The court then held that the residents were not “students” “at a school, college,
or university” who, under the statute, would be exempt from social security taxes. The
court held that both the statutory provisions and the relevant Treasury Regulations are
ambiguous on whether Detroit Medical’s residents qualify for the student exemption and
that resort to the legislative history therefore was appropriate. The court “f[ou]nd that
permitting medical residents to qualify for the student exception would lead to just such
result that is inconsistent with the intent of Congress. That is, medical interns would be
covered by FICA whereas medical residents would not.”
No. 07-1602 United States v. Detroit Medical Center Page 4
II
Although this is a tax case, the underlying question is whether the Social Security
Act covers Detroit Medical’s residents.
In determining the meaning of the applicable provisions of the Internal Revenue
Code, the Supreme Court has pointed out: “The very specificity of the exemptions …
and the generality of the employment definitions indicates that the terms ‘employment’
and ‘employee,’ are to be construed to accomplish the purposes of the legislation …a
constricted interpretation of the phrasing by the courts … would invite adroit schemes
by some employers and employees to avoid the immediate burdens at the expense of the
benefits sought by the legislation.” United States v. Silk, 331 U.S. 704, 711-12 (1947)
(footnote omitted). As this court stated in St. Luke’s Hosp. Ass’n v. United States, 333
F.2d 157, 164 (6th Cir. 1964), “in dealing with the beneficent purposes of the Social
Security Act, this court generally favors that interpretation of statutory provisions which
calls for coverage rather than exclusion.” Also relevant are the well-settled principles
that ”exemptions from taxation are to be construed narrowly,” Bingler v. Johnson, 394
U.S. 741, 752 (1969) and “do not rest upon implication,” U.S. Trust Co. v. Helvering,
307 U.S. 57, 60 (1939), but “must be unambiguously proved,” United States v. Wells
Fargo Bank, 485 U.S. 351, 354 (1988). In construing and applying those provisions,
therefore, we must keep in mind that the underlying question is whether Congress
intended the Social Security Act to cover Detroit Medical’s residents.
III
A. Section 3101 of Title 26 of the United States Code imposes a tax on the
“wages” of employees for “old-age, survivors and disability insurance and hospital
insurance.” Section 3111 imposes a similar tax on employers on the “wages” they pay.
“Wages” are defined in § 3121(a) as “all remuneration for employment” (with certain
exceptions not here involved), and “employment” is defined in § 3121(b) as “any
service, of whatever nature, performed by an employee for the person employing him
…except that such terms shall not include -------.” This is followed by a number of
exceptions, one of which for “students” we discuss in Part IV, below.
No. 07-1602 United States v. Detroit Medical Center Page 5
Detroit Medical contends that its residents’ stipends are “scholarships” or
“fellowships,” which a statutory provision provides are not part of “gross income,” and
as such are not subject to FICA taxes.
Section 117 of Title 26 provides in relevant part:
(a) General rule. Gross income does not include any amount received
as a qualified scholarship by an individual who is a candidate for
a degree at an educational organization described in section
170(b)(1)(A)(ii).
(b) Qualified Scholarship. For purposes of this section --
(1) In general. The term “qualified scholarship” means 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.
…
(c) Limitation.
Subsections (a) and (d) 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.
Section 170(b)(1)(A)(ii) refers to “an educational organization which normally
maintains a regular faculty and curriculum and normally has a regularly enrolled body
of pupils or students in attendance at the place where its educational activities are
regularly carried on.”
In other words, for Detroit Medical’s residents’ “stipends” to constitute
“qualified scholarships” that are not part of gross income, the amounts must have been
“used for qualified tuition and related expenses” and the residents must have been
“candidate[s] for a degree at an educational organization” that “normally maintains a
regular faculty and curriculum and normally has a regularly enrolled body of pupils or
students in attendance at a place where its educational activities are regularly carried
on.”
No. 07-1602 United States v. Detroit Medical Center Page 6
Detroit Medical’s theory apparently is that if the stipends are “scholarships” or
“fellowships” and therefore not part of “gross income” under § 117, then they were not
“wages” subject to FICA taxes under § 3101 and § 3111. That is an arguable and
perhaps a persuasive position, but the conclusion does not automatically follow from the
premises. Congress could have determined that although it would not include
“scholarships” in “gross income” (and therefore not subject them to the income tax),
they would be subject to FICA taxes. We need not resolve that question here, however,
since we conclude that Detroit Medical has not established that the stipends were
“scholarships” or “fellowships” under § 117.
B. In Bingler v. Johnson, supra, the Supreme Court considered the application
of these provisions in an earlier version of § 117 to an employer program under which
the employees were given paid “educational leave” for postgraduate education. The
Court upheld as valid a Treasury regulation that “limits the definitions of ‘scholarship’
and ‘fellowship’ so as to exclude amounts received as ‘compensation,’” 394 U.S. at 748.
The Court held that the definitions of those terms in the regulation “comport[ed] … 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. The Court ruled that “the jury here properly found that the
amounts received by the respondents were taxable ‘compensation’ rather than excludable
‘scholarships.’” Id. at 755-56, footnote omitted. The Court explained:
most importantly, Westinghouse [the employer] unquestionably extracted
a quid pro quo. The respondents not only were required to hold positions
with Westinghouse throughout the ‘work-study’ phase of the program,
but also were obligated to return to Westinghouse’s employ for a
substantial period of time after completion of their leave. The thrust of
the provision dealing with compensation is that bargained-for payments,
given only as a ‘quo’ in return for the quid of services rendered - whether
past, present, or future - should not be excludable from income as
‘scholarship’ funds.
Id. at 757-58, footnotes omitted.
In the present case, the residents also gave Detroit Medical a quid pro quo in
return for their stipends. The principal quid they furnished was the provision of patient
No. 07-1602 United States v. Detroit Medical Center Page 7
care services. Another item was teaching and supervision of other residents or students.
The benefit the residents provided to Detroit Medical was substantial. If there had been
no residents to provide patient care, presumably the hospitals would have been required
to hire other physicians to do so. Cf. Rockswold v. United States, 620 F.2d 166, 169 (8th
Cir. 1980) (amounts paid to physicians in advanced graduate medical degree programs
at university not excludable from gross income as fellowship grant because “the payment
was made as quid pro quo for the services rendered” and “there was sufficient evidence
for the district court finding that the purpose of the fellowship grants was reimbursement
for services and therefore there was quid quo pro.”).
The quid in this case was somewhat different from that in Bingler in that here,
in addition to benefitting Detroit Medical, the resident’s activities also were part of their
post-graduate training and education. In Bingler, on the other hand, the quid was solely
for the benefit of the employer. This distinction, however, is not a valid basis for not
applying the quid-pro-quo standard there enunciated. Since the residents were required
to provide both the patient care and teaching services, the stipends cannot be viewed as
“‘no strings’ educational grants, with no requirement of any substantial quid pro quo
from the recipients” that characterizes “scholarships” and “fellowships.” Bingler, 394
U.S. at 751.
C. Detroit Medical’s argument has other fatal flaws. To qualify as a scholarship,
the stipend must be paid to an individual “who is a candidate for a degree at an
educational organization.” 26 U.S.C. § 117(a). Detroit Medical’s residents, however,
are not candidates for a degree. Upon completing the residency, the resulting
recognition is not a degree but a certificate that enables the resident to take the specialty
board examination. Moreover, for the stipend to be a “qualified scholarship” under
§ 117(b)(1), it must have been “used for qualified tuition and related expenses.” Detroit
Medical’s residents, however, do not pay tuition to either the hospital at which they work
and train, or to Wayne State University. Detroit Medical “admit[ed]” that ”[t]here were
no restrictions placed on the use of the stipends paid to residents … .”
No. 07-1602 United States v. Detroit Medical Center Page 8
Moreover, since the residents are required to perform the services as a condition
of receiving the stipends, the latter would be “services by the student required as a
condition for receiving” the money, which under 26 U.S.C. § 117 (c) precludes it from
being a “scholarship” or “fellowship.”
In sum, the characteristics of the stipends Detroit Medical’s residents received
and the statutory provisions governing scholarships under the tax code establish that the
stipends are not scholarships or fellowships under § 117.
IV
The remaining question is whether the residents qualify as “students” under 26
U.S.C. § 3121(b)(10), which is one of the exemptions from FICA taxes imposed on
wages of employees. Section 3121(b)(10) exempts from FICA taxes “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.”
At issue, then, is “[w]hether a medical resident is a ‘student’ and whether he is
employed by a ‘school, college, or university,’” which “depend on the nature of the
residency program in which the medical residents participate and the status of the
employer.” United States v. Mount Sinai Med. Ctr. of Fla., 486 F.3d 1248, 1252 (11th
Cir. 2007). Although the student exception has two prongs—whether the individual is
a “student” and whether such student is “enrolled and regularly attending classes” at a
“school, college, or university”—these two elements are interrelated and affect each
other.
The statute does not define “student” but merely specifies where and how the
student must be studying for the exemption to apply. We assume that in the absence of
a congressional definition of “student,” this common word in § 3121 was intended to
have its usual and ordinary meaning of a person pursuing studies at an appropriate
institution, which the Act defines as a “school, college, or university” for the purposes
of the exemption. See Williams v. Taylor, 529 U.S. 420, 431-32 (2000) (Courts must
give words “their ordinary, contemporary, common meaning, absent an indication
No. 07-1602 United States v. Detroit Medical Center Page 9
Congress intended them to bear some different import.”). Building on this general
definition, the pertinent Treasury regulation 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 status
of a student in the performance of such services.” 26 C.F.R. § 31.3121(b)(10)-2(c)
(2003) (emphasis added).
To determine whether the doctors in Detroit Medical’s residency program are
students, we thus need to know what the residents in the program do and under what
circumstances. Yet throughout this case and in related cases in other jurisdictions, the
government has taken the position that this kind of fact development plays no role in the
inquiry. See Mount Sinai, supra; University of Chicago Hosp. v. United States, 545 F.3d
564 (7th Cir. Sept. 23, 2008). As the government sees the issue, all residents in all
medical residencies are not students—that as a per se matter a resident can never be a
student.
While the meaning of “student” indeed is a legal issue, the question whether
residents at the Detroit Medical Center come within the term is not. Before the district
court, the Medical Center argued that a facts–and-circumstances test governs this inquiry
and filed a motion under Rule 56(f) of the Federal Rules of Civil Procedure to permit
additional fact development before the court resolved this issue. While we have some
sympathy with the district court’s decision to move ahead with the case based on the
many facts that already had been developed and we remain quite open to the possibility
that this case still can be resolved through summary judgment, our deliberations have
prompted us to conclude that our decision in this case would be better informed if the
parties were given additional time to supplement the record. In particular, it would be
helpful if they could present evidence (preferably agreed-upon facts) about these points:
(1) how many hours a week does a typical resident spend at the hospital; (2) how many
hours a week does a typical resident spend in the classroom; (3) what other
responsibilities does a typical resident have under the program and how much time on
average do they take each week; (4) how is a typical resident’s time spent at the hospital:
No. 07-1602 United States v. Detroit Medical Center Page 10
Is it all spent providing patient care and supervising other residents and nursing
providing patient care (or being on call to do these things), or does it include other
activities and, if so, what are they and how much time do they typically take each week;
(5) what role do professors from Wayne State University play in supervising residents
while they provide patient care at the Medical Center; (6) who employs the residents:
the Detroit Medical Center, Wayne State University or some combination of the two;
and (7) if the student exception applies to the residents, is there any other state or federal
program under which the residents or their families would be (or would have been)
eligible for disability or survivor benefits of the kind provided by the Social Security
program?
In identifying these issues, we do not limit the parties in developing the record
in other ways. And nothing we have said limits the district court from reaching a
similar, or for that matter different, conclusion in resolving a future summary-judgment
motion. Given, however, that the parties already have developed the record extensively,
that this case has been pending for some time and that other district courts within the
circuit await our guidance on the point, we urge the parties to supplement the record
promptly, ask the district court to resolve any summary-judgment motions promptly and
suggest that, if the losing party has a right of appeal, it seek expedited appellate review,
which this panel will do its best to decide promptly.
CONCLUSION
For these reasons, we affirm the district court’s resolution of the “qualified
scholarship” exception to FICA, vacate its resolution of the “student” exception to FICA
and remand the case to the district court for further proceedings consistent with this
opinion.