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University of Utah v. United States

United States District Court, D. Utah

September 20, 2017

UNIVERSITY OF UTAH, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.

          Paul M. Warner Magistrate Judge

          MEMORANDUM DECISION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

          JILL N. PARRISH JUDGE UNITED STATES DISTRICT JUDGE

         Currently before the Court is Plaintiff's Motion for Partial Summary Judgment (ECF No. 29) and Defendant's Motion for Summary Judgment (ECF No. 30). Having considered the parties' motions, the related pleadings, and the record, the Court DENIES Plaintiff's Motion for Partial Summary Judgment and GRANTS Defendant's Motion for Summary Judgment.

         I. INTRODUCTION

         The University of Utah sued the United States seeking refunds of Federal Income Contributions Act (“FICA”) taxes with respect to certain medical residents. The University of Utah claims that the medical residents are exempt from FICA taxation because they are “students” under an agreement between the State of Utah and the Commissioner of Social Security. The United States challenges the University of Utah's interpretation, contending that medical residents are not “students” under the agreement and thus they are not exempt from FICA taxation. For the reasons set forth below, the Court agrees with the United States.

         II. STATUTORY AND REGULATORY BACKGROUND

         Congress, through the Social Security Act and related legislation, has created “a comprehensive national insurance system that provides benefits for retired workers, disabled workers, unemployed workers, and their families.” Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 48 (2011). “Congress funds Social Security by taxing both employers and employees under FICA on the wages employees earn.” Id. When Congress adopted the Social Security Act in 1935, it excluded services performed by state employees from coverage due to questions about whether it could compel state participation. Bowen v. Pub. Agencies Opposed to Soc. Sec. Entrapment, 477 U.S. 41, 44 (1986).

         In 1950, Congress passed 42 U.S.C. § 418 (“Section 218” of the Social Security Act), which allows states to voluntarily opt-in to the Social Security System. Bowen, 477 U.S. at 44-45.[1] States opt-in by executing “an agreement, ” commonly referred to as a § 218 agreement, with the Commissioner of Social Security. § 418(a)(1). Under a § 218 agreement, a state may define to a certain extent which state employees participate in Social Security. Bowen, 477 U.S. at 45. A § 218 agreement cannot be “inconsistent with the provisions of [§ 418].” § 418(a)(1).

         The Internal Revenue Code's state-employee exemption incorporates the various state § 218 agreements by excluding from FICA taxation “service performed in the employ of a State” unless the service is “included under an agreement entered into pursuant to section 218 of the Social Security Act.” I.R.C. § 3121(b)(7)(E).[2] In other words, services performed in the employ of a state are not subject to FICA taxation unless the state has opted in such services pursuant to a § 218 agreement. Id.

         When opting in employees pursuant to a § 218 agreement, “states may employ exclusions in their agreement to ensure that specified subsets of employees are not opted-in” through the § 218 agreement. U n i v. of Texas Sys. v. United States, 759 F.3d 437, 439 (5th Cir. 2014). One of the optional exclusions that a state may include in a § 218 agreement is for “services performed by a student.” 42 U.S.C. § 418(c)(5). Section 418(c)(5) cross-references the student exclusion applicable to private employers found in § 410(a)(10), which applies to “[s]ervices 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.” §418(c)(5). In short, § 418(c)(5) allows states to exempt “services performed by a student” from FICA taxation.

         The Social Security Administration (“SSA”) has a longstanding position, dating back to at least 1978, that medical residents do not qualify as students, as the term is used in the Social Security Act and § 218 agreements. See Mayo Found., 562 U.S. at 49 (observing that the SSA has “always held that resident physicians are not students.”). In 1978, the Commissioner of Social Security issued a ruling addressing the State of Arizona's claim that medical residents were students whose services were excluded under Arizona's § 218 agreement; and in the ruling, the Commissioner found that the medical residents were “not excluded from coverage under the student exclusion, ” explaining that the SSA “has always held that resident physicians are not students.” SSR 78-3, 1978 WL 14050 (1978).

         In 1998, the Eighth Circuit decided a case that involved the coverage under the Social Security Act of medical residents at the University of Minnesota during 1985 and 1986. Minnesota v. Apfel, 151 F.3d 742, 743 (8th Cir. 1998). The University was a state institution and had entered into a § 218 agreement with the SSA to provide coverage to its employees. Id. at 744. Minnesota and the SSA disputed whether the University's medical residents were “employees” as defined in the parties' § 218 agreement. Id. The court held that the medical residents were not “employees” as defined in the parties' § 218 agreement-and thus the medical residents were not subject to FICA taxation. Id. at 745-47.

         In a holding that was not necessary to the case because the court had already determined that the medical residents were not subject to FICA taxation since they were not employees, the court concluded that the medical residents were also not subject to FICA taxation because they qualified for the student exception of Minnesota's § 218 agreement and the Social Security Act. Id. at 747-48. In reaching this holding, the court rejected the SSA's “bright-line rule” that medical residents are not students because such a rule is “inconsistent with” the agency's regulation, which the court viewed as calling for a “case-by-case” determination of student status. Id. at 748. In response to Apfel, the SAA issued an “Acquiescence Ruling, ” in which the SSA stated that it would apply Apfel's c as e -by-case approach in the Eighth Circuit but noted that “[u]nder SSA rules, the services performed by medical residents do not qualify for the student exclusion.” SSAR 98-5(8), 63 Fed. Reg. 58, 444, 58, 446 (Oct. 30, 1998).

         On October 21, 1998, Congress granted states a brief, three-month opportunity to withdraw their student employees from social security coverage under their § 218 agreements.[3] Congress granted states this opportunity in a section of the Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999. Section 2023 of the Act provides:

Notwithstanding section 218 of the Social Security Act, any such agreement with a State (or any modification thereof) entered into pursuant to such section may, at the option of such State, be modified at any time on or after January 1, 1999, and on or before March 31, 1999, so as to exclude service performed in the employ of a school, college, or university if such service is performed by a student who is enrolled and is regularly attending classes at such school, college, or university.

Pub. L. 105-277 § 2023, 112 Stat. 2681. The stated reason for § 2023 was that “[t]hree states chose not to seek an exemption from Social Security coverage” and thus the provision “allows a limited window of time (January 1 through March 31, 1999) for States to modify existing State agreements to exempt students (including graduate assistants) from Social Security coverage who are employed by a public school, university, or college in a nonexempted State.” H.R. Rep. No. 105-825, at 1585 (1998) (Conf. Report); accord H.R. Rep. No. 105-817, at 58 (1998); Staff of Joint Comm. On Taxation, 105th Cong., ...


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