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Regents of the Univ. of Minn. v. United States: US District Court : TAX - refund of FICA taxes on medical residents' stipends

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Regents of the University
of Minnesota,
Plaintiff,
Civ. No. 06-5084 (RHK/JSM)
MEMORANDUM OPINION
AND ORDER
v.
United States of America,
Defendant.
Thomas W. Tinkham, Kristina W. Carlson, John W. Windhorst, Jr., Christopher R.
Duggan, Emily L. Fitzgerald, Theresa M. Bevilacqua, William R. Goetz, Dorsey &
Whitney LLP, Minneapolis, Minnesota, William P. Donohue, University of Minnesota,
Minneapolis, Minnesota, for Plaintiff.
Michael R. Pahl, Trial Attorney, Tax Division, United States Department of Justice,
Washington, D.C., for Defendant.
INTRODUCTION
Plaintiff Regents of the University of Minnesota (the “University”) commenced
this action against Defendant United States of America seeking a refund of the FICA
taxes withheld and paid on medical residents’ stipends during the second quarter of
2005.1 The amount of the University’s claim is ,094,803.92, plus interest. The
University has moved for summary judgment. For the reasons stated below, the Court
will grant that Motion.
1 FICA taxes refer to taxes collected pursuant to the Federal Insurance Contributions Act
(“FICA”).
2
BACKGROUND
The University operates graduate medical education programs for medical
residents and fellows (“residents”). (Compl. ¶ 5.) A medical resident is an individual
who has earned a medical degree and is participating in a residency program for
additional medical training in a specialty field, such as internal medicine or surgery. The
University entered into affiliation agreements with certain hospitals in Minnesota for the
purpose of providing educational experiences to the residents.2 (See, e.g., Pahl Decl. Tab
2 Ex. 114 at UM 02692.) Pursuant to the affiliation agreements, the University had
responsibility for the general educational experience of the residents, including
(1) determining educational goals, (2) establishing prerequisite criteria for placement,
(3) determining completion of assignments, (4) evaluating the residents’ performance,
and (5) selecting and appointing staff members at the affiliated hospital to the faculty of
the University for the purpose of training the residents. (Id. at UM 02692-02693.) Staff
physicians appointed to the University faculty had the “responsibility for teaching,
supervising, and evaluating the performance of residents.” (Id. at UM 02695.) In
addition, the University paid a stipend to the residents for the purpose of providing a
minimum level of financial support during their enrollment. (Compl. ¶ 5.)
FICA imposes taxes upon employers and employees for the support of the social
security system. See 26 U.S.C. § 3101 et seq. FICA taxes must be paid on “wages.” Id.
2 The University sold its own hospital to Fairview in 1997. (See Doc. No. 28 at ¶¶ 6-10, Ex. 5.)
3
FICA defines “wages” as “all remuneration for employment, including the cash value of
all remuneration (including benefits) paid in any medium other than cash.” 26 U.S.C.
§ 3121(a). Employers collect FICA taxes by withholding the required amounts from their
employees’ wages. See 26 U.S.C. § 3102(a). Employers also pay FICA contributions
equal to the amounts withheld from their employees’ wages. See 26 U.S.C. § 3111(a).
“Thus, FICA taxes are ‘paid in part by employees through withholding, and in part by
employers through an excise tax.’” Ahmed v. United States, 147 F.3d 791, 794 (8th Cir.
1998) (quoting United States v. Lee, 455 U.S. 252, 254 n.1 (1982)).
FICA, however, excludes several categories of “service” from “employment,”
including “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) (“Student Exclusion”).
In 1998, the Eighth Circuit Court of Appeals held that stipends paid by the
University to medical residents in 1985-1986 qualified for the Student Exclusion from
FICA taxation. See Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998). In 2003, this
Court similarly held that stipends paid by the Mayo Foundation to its medical residents in
1994-1996 qualified for the Student Exclusion.3 See United States v. Mayo Found. for
Med. Educ. & Research, 282 F. Supp. 2d 997 (D. Minn. 2003) (“Mayo I”), appeal
3 In 2006, this Court entered judgment dismissing a tax refund case related to stipends paid to
residents at Mayo for the period of 1997-2003, pursuant to the parties’ stipulation that the
residents’ stipends were similarly excluded from FICA tax coverage during those years. See
Mayo Found. for Med. Educ. & Research v. United States (D. Minn. Civ. No. 05-467, judgment
entered May 5, 2006).
4
dismissed by stipulation (8th Cir. File No. 03-3662, Jan. 7, 2004). In response to Apfel
and Mayo I, the IRS amended its regulations in 2004 (effective April 1, 2005) so that
medical residents no longer qualified for the exclusion.
The amended regulations provide in pertinent part that student status is determined
by “the relationship of the employee with the organization employing the employee.”
(“General Rule”)4 26 C.F.R. § 31.3121(b)(10)-2(d). In particular, an employee is
deemed a student if the services provided are “incident to and for the purpose of pursuing
a course of study.” 26 C.F.R. § 31.3121(b)(10)-2(d)(3)(i). In addition, “[t]he educational
aspect of the relationship between the employer and the employee, as compared to the
service aspect of the relationship, must be predominant in order for the employee’s
services to be incident to and for the purpose of pursuing a course of study.” Id. The
“educational” and “service” aspects of the relationship are based “on all the relevant facts
and circumstances.” Id.
However, the amended regulations also provide that “an employee whose normal
work schedule is 40 hours or more per week is considered a full-time employee,” and
therefore services performed by that individual are “not incident to and for the purpose of
pursuing a course of study.” 26 C.F.R. § 31.3121(b)(10)-2(d)(3)(iii) (“Full-time
Employee Exception”). In addition, an employee’s “normal work schedule” is “not
4 The amended regulations also added a “primary function test” to the definition of a “school,
college, or university.” 26 C.F.R. § 31.3121(b)(10)-2(c). By comparison, the pre-amended
regulations provided that “[t]he term ‘school, college, or university’ within the meaning of this
exception is to be taken in its commonly or generally accepted sense.” 26 C.F.R.
§ 31.3121(b)(10)-2(d) (Pre-4/1/05). There is no dispute that the University meets either
definition.
5
affected by the fact that the services performed by the employee may have an
educational, instructional, or training aspect.” Id. Consequently, a medical resident who
works 40 or more hours per week no longer qualifies for the Student Exclusion.
In contrast, the pre-amended regulations provided that student status should be
determined “on the basis of the relationship of such employee with the organization for
which the services are performed” and that “[a]n employee who perform[ed] services in
the employ of a school, college, or university, as an incident to and for the purpose of
pursuing a course of study” was a student. 26 C.F.R. § 31.3121(b)(10)-2(c) (Pre-4/1/05).
The pre-amended regulations did not have a Full-time Employee Exception.
The University withheld and paid FICA taxes on the stipends it paid to medical
residents enrolled in its residency programs during the second quarter of 2005.
Thereafter, the University timely filed a refund claim with the IRS for ,094,803.92,
asserting that the Full-time Employee exception of the amended regulations was invalid.
The IRS did not act upon the claim, and in December 2006, the University filed this
action.5 See 26 U.S.C. § 6532. In August 2007, this Court held that the amended
regulations were invalid. See Mayo Found. for Med. Educ. & Research v. United States,
503 F. Supp. 2d 1164, 1171-77 (D. Minn. 2007) (“Mayo II”).6
5 Count One of the University’s Complaint seeks a refund of the FICA taxes withheld and paid
on the residents’ stipends during the second quarter of 2005 on the basis that the Full-time
Employee Exception is invalid. Counts Two, Three, and Four seek the same relief under
alternative theories. (See Compl. ¶¶ 19-37.)
6 The Government has appealed Mayo II to the Eighth Circuit.
6
STANDARD OF DECISION
Summary judgment is proper if, drawing all reasonable inferences in favor of the
nonmoving party, there is no genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986). The moving party bears the burden of showing that the
material facts in the case are undisputed. Celotex, 477 U.S. at 322; Mems v. City of St.
Paul, Dep’t of Fire & Safety Servs., 224 F.3d 735, 738 (8th Cir. 2000). The Court must
view the evidence, and the inferences that may be reasonably drawn from it, in the light
most favorable to the nonmoving party. Graves v. Ark. Dep’t of Fin. & Admin., 229
F.3d 721, 723 (8th Cir. 2000); Calvit v. Minneapolis Pub. Schs., 122 F.3d 1112, 1116
(8th Cir. 1997). The nonmoving party may not rest on mere allegations or denials, but
must show through the presentation of admissible evidence that specific facts exist
creating a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256
(1986); Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995).
ANALYSIS
The University asserts that the Full-time Employee Exception of the amended
regulations is invalid because it is inconsistent with the plain meaning of the Student
Exclusion or, alternatively, conflicts with regulations promulgated by the Social Security
Administration. (Pl.’s Mem. at 10-15.) It also contends that the Government is barred
by collateral estoppel from re-litigating whether medical residents qualify for the Student
Exclusion or, alternatively, that residents qualify for the exclusion based on the merits.
7
(Pl.’s Reply Mem. at 15-29.) In response, the Government asserts that collateral estoppel
does not apply because the controlling facts and applicable legal rules have changed.
(Def.’s Second Opp’n Mem. at 31-43.) It further argues that there is a genuine issue of
material fact as to whether residents qualify for the Student Exclusion. (Id. at 5-29; 44-
54.) Finally, the Government briefly argues that the amended regulations are valid, but
recognizes that this Court held otherwise in Mayo II.7 (Id. at 54-56.)
Because the Court previously held in Mayo II that the Full-time Employee
Exception of the amended regulations is invalid, it is not necessary to address the
collateral-estoppel issue or whether the amended regulations conflict with the regulations
from the Social Security Administration. Therefore, the Court will determine (1) whether
the residents were “employed” by the University and (2) whether they were “students”
who “regularly attend[ed] classes” at the University so as to qualify for the Student
Exclusion.
7 The Government asserts that this Court’s review of the amended regulations is governed by
Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and not
National Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472 (1979). In support of this
argument, the Government relies upon Swallows Holding, Ltd. v. Commissioner, 515 F.3d 162,
167 (3rd Cir. 2008), which held “that the Tax Court erred in applying National Muffler to the
extent that the National Muffler factors are inconsistent with [the] Chevron analysis.” In Mayo
II, this Court stated that “[t]here is no indication that the standard in National Muffler was
changed by Chevron. Regardless, the Court reaches the same conclusion under either standard.”
503 F. Supp. 2d at 1171. Indeed, the Government fails to get past the first prong of the Chevron
analysis because this Court held in Mayo I that the statutory language of the Student Exclusion
was clear and unambiguous. Id. at 1171-73, 1175-76 (citing Mayo I, 282 F. Supp. 2d at 1007,
1013-18). Under Chevron, if the statutory language is clear, the Court’s inquiry ends and the
plain meaning of the statute governs the action. 467 U.S. at 842-43.
8
I. Application of the Student Exclusion to the University Residents8
A. “In the Employ of a School, College, or University”
The first issue is whether the residents’ services are performed in the “employ” of
the University. For FICA purposes, the employment relationship is determined under the
“common-law” employer-employee relationship as follows:
Every individual is an employee if under the usual common law rules the
relationship between him and the person for whom he performs services is
the legal relationship of employer and employee . . . . Generally such
relationship exists when the person for whom services are performed has
the right to control and direct the individual who performs the services . . . .
26 C.F.R. § 31.3121(d)-1(c). The Government contends that the hospitals possessed the
right to control the residents and direct the manner and means by which they provided
patient care.9 (Def.’s Second Opp’n Mem. at 5-13; 44-52.). The evidence, however,
contradicts the Government’s contention. (See, e.g., Carlson Aff. Ex. 2 at 40; Ex. 3 at
102-103; Ex. 7 at 85, 87, 106; Ex. 12 at 73, 90.)
8 Because the Court has previously held that the amended regulations are invalid, the Court will
apply the pre-amended regulations to determine whether the residents qualify for the Student
Exclusion.
9 The Government relies upon several cases to show that the residents were controlled by the
staff physicians at the hospitals and therefore were employed by the hospitals. (See Def.’s
Second Opp’n Mem. at 44-46.) Those cases, however, are inapposite. Indeed, Cody v. Ribicoff,
289 F.2d 394 (8th Cir. 1961), involved neither a resident nor a hospital. Moreover, St. Luke’s
Hospital Ass’n v. United States, 212 F. Supp. 387 (N.D. Ohio 1962), rev’d on other grounds, 333
F.2d 157 (6th Cir. 1964); Boston Medical Center Corp., 330 NLRB 152, 1999 WL 1076118
(1999), and Rockswold v. United States, 471 F. Supp. 1385 (D. Minn. 1979), actually support
the University’s position because the faculty physicians supervised and controlled the residents.
Finally, the Government refers to a medical malpractice case, in which the court found that “as
employer of the resident, Ramsey Hospital clearly exercised legal control over Dr. Lisita and was
liable for her negligence.” Dang v. St. Paul Ramsey Med. Ctr., 490 N.W.2d 653, 657 (Minn. Ct.
App. 1992). However, the University was not a party in that case and therefore did not
participate in the parties’ stipulation that the resident was an employee of Ramsey Hospital. Id.
at 656.
9
The University faculty and program directors interviewed candidates and selected
residents for its residency programs. (See, e.g., id. Ex. 9 at 58-59; Ex. 12 at 64-65, 93;
Ex. 17 at 52; Ex. 18 at 44-45; Ex. 25 at ¶ 4; Ex. 19 at ¶ 3; Ex. 20 at ¶ 3; Ex. 26 at
¶ 4.) In addition, the University had affiliation agreements with certain hospitals in
Minnesota at which residents could perform their residencies. (See, e.g., Pahl Decl. Tab
2 at Ex. 114). These hospitals had supervising physicians who were appointed to the
University faculty and were responsible for “teaching, supervising and evaluating the
performance of [the] residents.” (Id. at UM 02695).
Notably, residents signed residency agreements with the University for each year
of the residency program. (Carlson Aff. Ex. 4 at 97, Govt. Exs. 67-69; Ex. 25 at ¶ 4, Ex.
C at UM 03286.) The residency agreement provided that the resident would “accept the
duties, responsibilities, and rotations assigned by the program director or designee[;] . . .
participate fully in the educational and scholarly activities of the residency program[;] . . .
[and] provide safe, effective, and compassionate care of patients under faculty
supervision.”10 (Id. Ex. 4, Govt. Ex. 67 at UM 06723-24 (emphases added).) The
University also paid the residents’ stipends and benefits, which included malpractice
insurance.11 (Id. at UM 06724.) In addition, the University, not the hospitals, had the
10 An affiliated hospital’s policies did not dictate how the University’s residents should be taught
while they were at the hospital. (Pahl Decl. Tab 1 at 76.)
11 The Government contends that the trial proceeding in a malpractice case against a former
resident “demonstrates that residents were not University employees.” (See Def.’s Second
Opp’n Mem. at 12.) The Court disagrees. Although the University’s counsel in that malpractice
action stated in a letter that residents were “students” and not University “employees,” he did not
contend that residents were hospital employees. (Pahl Decl. Tab 20 at Ex. 176.) Rather, he
10
power to suspend or terminate a resident from a residency program.12 (Id. at UM 06725-
26.) In essence, the residency agreement was an employment agreement between the
University and the residents. Thus, the University contractually retained the right to
control the residents.
The Government, however, contends that the hospitals benefited economically
from the residents’ services, whereas, the University did not receive any benefit or
services from the residents.13 (Def.’s Second Opp’n Mem. at 10.) This argument ignores
the crucial fact that the University is a nonprofit organization; its purpose and function is
medical education. The University benefits when the residents complete the residency
program because it has fulfilled its educational mission of preparing residents to practice
in a medical specialty. The Government also argues that the residents’ stipends were
compensation for services. (Id. at 11.) But, the question of whether the residents’
services are performed in the “employ” of the University “depends not on the nature of
acknowledged that the University provides insurance coverage for the residents and was
“responsible” for them. (Id.) Notably, no hospital was named as a defendant in that malpractice
action, and the University’s counsel represented both the University and the resident. (Id. at Ex.
175.)
12 The Court notes that in cases where a resident’s conduct threatened the safety or welfare of a
patient, an affiliated hospital had the limited power to “suspend” the resident’s participation at
the hospital. (Carlson Aff. Ex. 1, Govt. Ex. 114 at UM 2696; Ex. 8, Govt. Ex. 113 at UM12591-
92.) Nonetheless, the University had the final say as to whether a resident would be disciplined
or dismissed from the program. (Id. Ex. 4, Govt. Ex. 67 at UM 06725-26.)
13 The Government also argues that the hospitals really paid the residents’ stipends and benefits
because the hospitals reimbursed the University. (Def.’s Second Opp’n Mem. at 10-11.) The
hospitals, however, did not completely reimburse the University. (See Carlson Aff. Ex. 13 at 55;
Ex. 24 at ¶¶ 3-4.) Moreover, the ultimate responsibility of paying the residents’ stipends and
benefits remained with the University.
11
stipends but on the nature of the residents’ relationship with the University.” Apfel, 151
F.3d at 748 n.9.
Program directors, not the hospitals, were responsible for determining the
residents’ rotation schedules. (Carlson Aff. Ex. 4 at 103; Ex. 5 at 42; Ex. 6 at 109-11; Ex.
7 at 85-87; Ex. 9 at 18; Ex. 12 at 90; Ex. 17 at 54, 68.) Moreover, there is no evidence
that the hospitals ever “hired” or “fired” residents; rather, residents enrolled in the
University’s residency program and were assigned to “rotations” – which took them to
the affiliated hospitals – pursuant to a written curriculum that the program director of the
given residency program established. (Id. Ex. 17 at 67; Ex. 19 at ¶ 3; Ex. 20 at ¶ 3; Ex.
26 at ¶ 4.) The Government, however, argues that the hospitals directed the residents
through attending physicians. (Def.’s Second Opp’n Mem. at 7-8, 9-10.) But, the
attending physicians who taught and supervised the residents had an academic
appointment at the University.14 (Carlson Aff. Ex. 1, Govt. Ex. 106 at FV 001743; Ex. 2
at 40; Ex. 3 at 102-03; Ex. 6 at 120-30; Ex. 7 at 85, 87, 106; Ex. 8 at 79; Ex. 9 at 7, 15;
Ex. 12 at 66, 73, 90; Ex. 14 at 44; Ex. 17 at 66.) In other words, the physicians involved
in the University residency program held faculty appointments and acted as agents of the
University in the administration of the program. Thus, residents learned how to care for
patients under the supervision and control of the University-faculty physicians. (Id. Ex. 7
14 The Government cites to a Texas malpractice case, in which the court held that a resident was
not an employee of the sponsoring institution because he was a “borrowed employee” of a
participating institution at which his services were performed. St. Joseph’s Hosp. v. Wolff, 94
S.W.3d 513, 542-44 (Tex. 2002). The Court is not persuaded by that decision and agrees with
the dissenting opinion which concluded that the resident was employed by the sponsoring
institution because it had contractually retained control over him. Id. at 545-50.
12
at 112-13; Ex. 9 at 14-15, 75-76; Ex. 14 at 75-76.) Based on the foregoing, the Court
finds that the residents’ services were performed in the “employ” of the University.
B. Student Status
The final issue is whether the residents are students. The statutory test is whether
the individual was “enrolled and regularly attending classes” at the University. See 26
U.S.C. § 3121(b)(10). In particular, “[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” is deemed to be a student. 26 C.F.R. § 31.3121(b)(10)-2(c) (Pre-4/1/05);
see also Apfel, 151 F.3d at 748 (stating that an analysis of student status requires “a caseby-
case examination” to determine whether the resident’s relationship with the
organization was “primarily for educational purposes or primarily to earn a living”)
(emphasis added).
1. “Enrolled” in a residency program
The record shows that the residents were enrolled at the University. (Carlson Aff.
Ex. 3, Govt. Ex. 32 at UM 03011 (“All residents and fellows are formally enrolled as
students” at the University, “are automatically registered each semester for their Medical
School training course . . . [and] [f]ormal registration at the University of Minnesota
Medical School is a requirement of our training programs”); Ex. 4 at 13; Ex. 11 at 7-9;
22; Ex. 12 at 36; Ex. 18 at 17 (departments within medical schools enroll residents). )
The Government, however, argues that the residents applied to a residency program
through the National Resident Matching Program (“NRMP”) and therefore the
13
enrollment at the University was meaningless. (Def.’s Second Opp’n Mem. at 13.) But,
“the NRMP is not an application service or job placement service. Applicants must apply
directly to residency programs in addition to registering for the Match.” See
http://www.nrmp.org/res_match/index.html (last visited March 28, 2008). Consequently,
applicants have to apply to the residency programs of their choice using the method
accepted by the program. Most programs at the University participate in the Electronic
Residency Application Service (“ERAS”), a service that transmits residency applications,
letters of recommendation, medical-student-performance evaluations, transcripts, and
other supporting credentials to the residency programs through the Internet. (See Pahl
Decl. Tab 9 at 97-98; see also http://www.aamc.org/audienceeras.htm (last visited March
28, 2008).) The University reviews the applications; applicants are then interviewed by
the program directors and faculty physicians. (See, e.g., Carlson Aff. Ex. 9 at 58-59; Ex.
12 at 64-65, 93; Ex. 17 at 52; Ex. 18 at 44-45; Ex. 25 at ¶ 4; Ex. 19 at ¶ 3; Ex. 20 at ¶ 3;
Ex. 26 at ¶ 4.) Indeed, the program directors have the ultimate authority in determining
which applicants it intends to admit and in what order of preference. (Id. Ex. 20 at ¶ 3.)
The University’s decision and the applicant’s preference are then “matched.” (Pl.’s
Reply Mem. at 12-13, n.20.) Finally, residents paid tuition of ,200 for the relevant
time period, which was deducted from the residents’ paychecks during their academic
year.15 (Carlson Aff. Ex. 13 at 16, 29, 36; Ex. 18, Govt. Ex. 64 at UM 03099.) Thus, the
residents were clearly enrolled at the University.
15 The Government argues that the residents were not enrolled at the University because the
14
2. “Regularly Attending Classes”
The crux of the Government’s argument is that the residents were not students
who regularly attended classes, but were physicians who worked in hospitals. (Def.’s
Second Opp’n Mem. at 13-29.) The record, however, establishes that the clinical setting
is the classroom for residents. Indeed, “[t]he transition between medical school and
residency is a transition from more book learning to more hands-on learning” and even
though residents have received medical degrees and have knowledge about illnesses and
treatments, they have not fully learned how to safely perform medical procedures on
patients until after they have completed their residency program. (See Carlson Aff. Ex.
10 at 83; Ex. 18 at 48.) Simply put, the educational aspect of the University’s residency
program necessarily includes learning how to safely care for patients. Thus, the principal
classroom for residents must be the clinical setting because they learn by caring for
patients in a medical specialty under the supervision of a University-faculty member.
Each year, residents had 13 four-week blocks called “rotations,” a term often used
interchangeably with “course.”16 (Id. Ex. 3 at 29-30; Ex. 4 at 16; Ex. 6 at 21.) Residency
courses are listed in the University’s electronic catalog, which describes the learning
hospitals paid the residents’ purported tuition by reimbursing the University for the residents’
stipends. (Def.’s Second Opp’n Mem. at 19-23.) That the hospital reimbursed the University for
the residents’ stipends does not mean that the residents were not enrolled in a residency program
at the University. See Mayo I, 282 F. Supp. 2d at 1002, 1015-16 (finding that residents were
enrolled despite the fact that they did not pay tuition to participate in a residency or fellowship
program.) Regardless, the other factors support a finding that the residents were enrolled at the
University.
16 Program coordinators at the University registered residents for courses and the residents
received credits. (Carlson Aff. Ex. 5 at 18, 26, 28; Ex. 11 at 8, 12, 14, 17-19; 22; Ex. 17 at 65.)
15
objectives of the program, the required conferences and reading, and the subject matter to
be covered in a residency program through a schedule of rotations. (Id. Ex. 11 at 18-19;
see, e.g., http://www.medres.umn.edu/medres/program/rotations/gastroenterology.html
(last visited March 28, 2008).) Rotations covered a variety of medicine-related topics
and each had a written curriculum. (See, e.g., Carlson Aff. Ex. 4 at Govt. Ex. 23; Ex. 6 at
UM 06013-6112.) Furthermore, residents regularly attended conferences and lectures
throughout the week. (Id. Ex. 1 at 13; Ex. 2 at 15, 34, 59; Ex. 3 at 71-72; 83; Ex. 4 at 46-
55, 63-64, Govt. Ex. 35 at UM 022967 (conferences include Morning Report with
Faculty, Morbidity and Mortality, Weekly Grand Rounds, Core Conferences, Journal
Club, and Seminars).) Residents also took exams, including an “in-training” exam to
identify areas of weakness, and other tests while on certain rotations. (Id. Ex. 2 at 52; Ex.
3 at 37-38; Ex. 4 at 18-19; Ex. 6 at 72-74; Ex. 10 at 69-70; Ex. 18 at 18-19.) A
resident’s performance in each subject-matter rotation was evaluated, graded, and
recorded on the resident’s transcript.17 (Id. Ex. 11 at 6-7, Govt. Ex. 139 at UM 2940-42;
Ex. 4, Govt. Ex. 67 at UM 06725.) Based on the foregoing, the Court finds that the
University residents were “regularly attending classes.”
17 The University may require a resident to repeat some or all of a rotation if the student failed to
perform adequately during a rotation. (Carlson Aff. Ex. 6 at 76-77; Ex. 15 at 8-11; Ex. 17 at 66.)
In general, the University considers residency a pass-fail endeavor. (Id. Ex. 12 at 19; Ex. 11 at
19-21.) Upon completion of the residency program, residents received diplomas or certificates
of completion from the University at a graduation ceremony. (Id. Ex. 3 at 45-46; Ex. 10 at 80-
81; Ex. 11 at 8-9.)
16
3. “Incident to and for the Purpose of Pursuing a Course of Study”
The Government argues that the residents’ services were not “incident to and for
the purpose of pursuing a course of study” because the hospitals paid the residents to
work long hours taking care of patients. (Def.’s Second Opp’n Mem. at 27-28.) It
further contends that the “residents provided patient-care services when education was
minimal or nonexistent.” (Id. at 28.) The Court disagrees. The primary purpose of the
University’s residency program is educational. (See, e.g., Carlson Aff. Ex. 19 at 94
(“residency program is there to meet the educational needs of the resident, not the service
needs of the hospitals”); Ex. 7 at 99, 116; Ex. 8 at 57-58, Govt. Ex. 155 at 1, 10-11.)
Residents spent the majority of their time learning how to care for patients under the
watchful eye of a faculty physician. (Id. Ex. 3 at 30, 83; Ex. 12 at 36-37.) Indeed, the
clinical setting was the principal classroom for residents because this was where they
learned how to provide patient care. As discussed above, residents applied to and
enrolled in residency programs at the University. The residents’ primary purpose for
enrolling in a residency program at the University was educational – to gain the
knowledge and skill necessary to practice in a specialty area of medicine. (See, e.g., id.
Ex. 3 at 30-31.) The goal of providing educational experiences to the residents in a
clinical setting is precisely the purpose behind the affiliation agreements. (See, e.g., Pahl
Decl. Tab 2, Govt. Ex. 114.) Further, the record establishes that the hospitals understood
that the residents were there to learn because the faculty physicians “could [have] easily
provide[d] [patient-care] services in a more efficient and quicker fashion if they didn’t
17
have residents.” (Carlson Aff. Ex. 9 at 28.) Accordingly, the Court finds that the patientcare
services provided by residents in the University’s residency programs were
incidental to and for the purpose of pursuing a course of study in postgraduate medical
education.
CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED that Plaintiff’s Motion for Summary Judgment (Doc. No. 25) is GRANTED
IN PART as follows:
1. Plaintiff’s Motion is GRANTED as to Count One of its Complaint;
Plaintiff is entitled to a refund of FICA taxes withheld and paid in the
amount of ,094,803.92, plus interest; and
2. Counts Two, Three, and Four of Plaintiff’s Complaint are DISMISSED
WITHOUT PREJUDICE.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Date: April 1, 2008
s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge
 

 
 
 

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