In the
United States Court of Appeals
For the Seventh Circuit
No. 07-1838
U NIVERSITY OF C HICAGO H OSPITALS,
Plaintiff-Appellee,
v.
U NITED S TATES OF A MERICA,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 5120—Matthew F. Kennelly, Judge.
A RGUED O CTOBER 23, 2007—D ECIDED S EPTEMBER 23, 2008
Before B AUER, C UDAHY, and SYKES, Circuit Judges.
S YKES, Circuit Judge. The University of Chicago Hospitals
(“UCH”) brought this refund action against the United
States to recover taxes it paid in 1995 and 1996 under the
Federal Insurance Contributions Act (“FICA”), 26 U.S.C.
§§ 3101-3128, on behalf of its medical residents. UCH
maintains it is entitled to a refund because its residents
qualified for the “student exception” from FICA tax under
the Internal Revenue Code (“IRC”), 26 U.S.C. § 3121(b)(10),
2 No. 07-1838
and the controlling Treasury Regulation in place during
the relevant time period, 26 C.F.R. § 31.3121(b)(10)-2.
The district court agreed initially to entertain the gov-
ernment’s motion for summary judgment on the question
of whether medical residents are categorically not “stu-
dents” under § 3121(b)(10) and therefore not exempt from
FICA tax as a matter of law. If the answer to this question
was “no”—that is, if residents may qualify for the student
exception—then the case would proceed on the question
of whether UCH’s residents were students within the
meaning of § 3121(b)(10).
The district court rejected the government’s argument
that residents were per se ineligible for the student excep-
tion and certified its order for immediate appeal under
28 U.S.C. § 1292(b). We granted the government’s petition
for interlocutory appeal and now affirm. The student
exception unambiguously does not categorically exclude
medical residents as “students” potentially eligible for
exemption from payment of FICA taxes. Even if we were to
consider the statute ambiguous, the implementing Trea-
sury Regulation applicable at the time and entitled to
deference under Chevron, U.S.A., Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 (1984), sets forth a
method for determining eligibility for the student excep-
tion—one that focuses on the character of the employing
organization as a school, college, or university and the
relationship of the employee-student to that organization.
This necessarily implies a case-specific analysis, not a
categorical ineligibility for certain classes of employee-
students.
No. 07-1838 3
I. Background
UCH is a not-for-profit Illinois corporation affiliated
with the University of Chicago. Like many hospitals in
the United States, UCH administers graduate medical-
education programs for residents in various specialties.
Although the role of medical residents at hospitals varied
throughout the twentieth century, today residents are
generally recent graduates of medical schools who
perform services at hospitals as the last step in their
medical training for the purpose of gaining expertise in
patient care and in their chosen specialty. Many states
require at least one year of residency before granting an
unrestricted license to practice medicine, and a standard
residency lasts three to seven years, depending upon
the specialty. Most teaching hospitals require their resi-
dents to take classes in the form of lectures and demonstra-
tions, and to submit to regular evaluations by senior
doctors. Medical-residency programs are accredited by
the Accreditation Council for Graduate Medical Education.
See Accreditation Council for Graduate Medical Education,
http://www.acgme.org/acW ebsite/newsRoom/
ACGMEfactsheet.pdf (last visited August 26, 2008).
UCH filed timely requests for refunds of the FICA taxes
paid on behalf of its medical residents for the years 1995
and 1996, citing the “student exception,” 26 U.S.C.
§ 3121(b)(10). After the IRS took no action, UCH filed this
refund action, seeking $5,572,705 it had paid in FICA
contributions for its residents in those years. The district
court bifurcated the proceeding, first addressing the
government’s argument that medical residents were
4 No. 07-1838
categorically ineligible for the student exception as a
matter of law. If the court agreed with this argument, UCH
would lose; if not, the case would proceed on the specific
question of whether UCH’s residents qualified for the
student exception.
The district court answered the threshold legal question
“no,” rejecting the government’s argument that residents
were per se precluded from qualifying as students under
§ 3121(b)(10). The court thus denied the government’s
summary judgment motion and certified its order for
immediate appeal under 28 U.S.C. § 1292(b). The gov-
ernment petitioned for leave to bring an interlocutory
appeal. This court granted that request, and this appeal
followed.
II. Discussion
Our standard of review is de novo. 330 W. Hubbard Rest.
Corp. v. United States, 203 F.3d 990, 994 (7th Cir. 2000) (court
of appeals reviews the district court’s decision on “sum-
mary judgment, as well as its interpretation of the tax code,
de novo”). FICA taxes fund the Social Security Trust Fund
and are levied on wages. See 26 U.S.C. §§ 3101(a) & (b),
3111(a) & (b). “Wages” are defined as “remuneration for
employment.” 26 U.S.C. § 3121(a). “Employment,” in turn,
means “any service, of whatever nature, performed . . . by
an employee for the person employing him.” 26 U.S.C.
§ 3121(b). These definitions are extremely broad; the
statute also contains numerous exceptions exempting
certain enumerated employment relationships from FICA
tax liability. At issue here is the so-called “student excep-
tion,” which provides:
No. 07-1838 5
[Employment] shall not include . . . .
(10) service performed in the employ of—
(A) a school, college, or university, or
(B) an organization described in section 509(a)(3)
if the organization is organized, and at all times
thereafter is operated, exclusively for the benefit of,
to perform the functions of, or to carry out the
purposes of a school, college, or university and is
operated, supervised, or controlled by or in con-
nection with such 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).
The government maintains that medical residents are
per se ineligible for the student exception. It makes a
very brief textual argument in support of this position,
asserting that “it is scarcely the most natural reading of the
word ‘student’ to interpret it as applying to a medical
resident” because a resident already has a medical degree
and has “merely entered a post-medical school residency
program at a hospital.” Likewise, the government adds, a
hospital is not a “school, college, or university” in “the
most common sense of those words.” We are unpersuaded.
A teaching hospital like UCH may indeed be regarded as
part of the university with which it is affiliated for pur-
poses of the student exception. And medical-school
graduates participating in postgraduate medical residen-
cies at university hospitals may be regarded as
6 No. 07-1838
students within the meaning of the statute even though
they already possess a medical degree. Simply put, there
is nothing in the statute itself that categorically excludes
medical residents from eligibility for the student excep-
tion. Stated differently, the student exception, by its terms,
does not preclude medical residents from attempting to
bring themselves within the exemption from FICA tax
liability.
The vast bulk of the government’s argument rests on
inferences drawn from statutory and legislative his-
tory—more specifically, the statutory and legislative
history of a different FICA tax exception, one pertaining
to medical interns, codified at 26 U.S.C. § 3121(b)(13),
which was repealed in 1965. To prevail on this argu-
ment, the government must establish that the statute is
ambiguous, and further, that the implementing Treasury
Regulation applicable during the relevant time period is
an impermissible interpretation of the statute. Arnett v.
Comm’r, 473 F.3d 790, 793 (7th Cir. 2007) (citing Chevron,
467 U.S. at 842-43). It has done neither.
We note initially that the district court implicitly con-
cluded that the statute is ambiguous and then deferred to
the Treasury Regulation under Chevron. The district court
apparently saw ambiguity in the statute’s failure to
specifically address whether medical residents may
qualify for the student exception. But the statute’s silence
on the specific subject of medical residents does not
necessarily mean it is ambiguous. The interpretation the
government advances—that the student exception is
categorically inapplicable to residents—is textually untena-
No. 07-1838 7
ble for the reasons we have already stated. We agree
with the Eleventh Circuit that the student exception,
§ 3121(b)(10), “[b]y its plain terms . . . does not limit the
type[ ] of services that qualify for the exemption.” United
States v. Mount Sinai Med. Ctr., 486 F.3d 1248, 1252 (11th
Cir. 2007).
Even if we were to conclude that the statute’s silence
on the subject of medical residents makes it ambiguous
on the question of whether residents as a class are ineligi-
ble for the student exception, we would turn first to the
applicable Treasury Regulation. Treasury regulations
promulgated pursuant to the “IRC’s general grant of
authority to prescribe rules to enforce the provisions of
the IRC” are entitled to deference if “the agency’s con-
struction of the statute is permissible.” Arnett, 473 F.3d
at 793; see also Bankers Life & Cas. Co. v. United States, 142
F.3d 973, 977-83 (7th Cir. 1998) (discussing the levels of
deference given to tax regulations promulgated pursuant
to specific and general statutory grants of authority,
revenue rulings, and private letter rulings). A regulation
is permissible and “will be controlling, unless the regula-
tion is ‘arbitrary, capricious, or manifestly contrary to the
statute.’ ” Arnett, 473 F.3d at 793 (quoting Chevron, 467 U.S.
at 843-44). That is, a regulation “will be permissible, and
we shall defer to it, so long as the interpretation is a
reasonable construction of the statute.” Id.
The Treasury Regulation applicable during the relevant
time period provides as follows:
(b) For purposes of this exception, the amount of
remuneration for services performed by the employee
8 No. 07-1838
in the calendar quarter, the type of services performed
by the employee, and the place where the services
are performed are immaterial. The statutory tests are
(1) the character of the organization in the employ of
which the services are performed as a school, college,
or university . . . and (2) the status of the employee
as a student enrolled and regularly attending classes
at the school, college, or university . . . .
(c) The status of the employee as a student performing
the services shall be determined 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 . . . .
26 C.F.R. § 31.3121(b)(10)-2 (1975). The regulation thus
prescribes a case-specific test for whether the student
exception applies, one that focuses on the character of the
employing organization as a school, college, or university,
and its relationship to the employee claiming student
status. The amount the employee is paid, the type of
services performed, and the place where services are
performed are immaterial.
The government does not suggest that § 31.3121(b)(10)-2
is unreasonable, arbitrary, capricious, or invalid. It
argues instead that the regulation “has no application” to
medical residents and therefore we may simply disregard
No. 07-1838 9
it, never mind the question of its entitlement to deference.1
Again, the government’s argument proceeds from infer-
ences about the statutory and legislative history of the
student exception and the intern exception. That is, the
government maintains that the Treasury Regulation
must be read in light of the legislative history of the
student and intern exceptions, which establishes (so the
argument goes) that Congress intended to categorically
exclude medical residents from eligibility for the student
exception. This legislative history, the government con-
cludes, demonstrates that the Treasury Regulation—and
the case-specific tests it specifies—does not apply to
medical residents.
In addition, the government notes that the regulation
was revised, effective April 1, 2005, to provide that an
employee who works at least 40 hours per week is consid-
ered a full-time employee and not eligible for the
student exception because his services are deemed not
“incident to and for the purpose of” a course of study. See
T.D. 9167, 2005-1 C.B. 261, Treas. Reg. § 31.3121(b)(10)-
2(d)(3) (2005). Acknowledging that the new regulation is
not applicable here, the government nevertheless main-
tains that it adopts a “per se approach” that necessarily
excludes medical residents since “no medical resident . . .
today works less than 40 hours per week.” Therefore, the
1
The government’s argument in this regard makes it unneces-
sary for us to determine what particular level of deference is
called for in this case. See Bankers Life, 142 F.3d at 977-83 (dis-
cussing the difference between tax regulations promulgated
pursuant to specific and general statutory grants of authority).
10 No. 07-1838
government argues, the new regulation implements “the
congressional intent of precluding medical residents . . .
from being eligible for the student exception.”
We will set aside for the moment the unconventional
nature of this approach to Chevron deference and the
oddity of arguing that an inapplicable regulation
somehow demonstrates that the applicable regulation
does not apply. We have already concluded that
§ 3121(b)(10) unambiguously does not exclude medical
residents from eligibility for the student exception. Accord-
ingly, we need not entertain this foray into legislative
history. For the sake of completeness, however, we will
briefly sketch the legislative activity regarding the
student and intern exceptions on which the government
relies.
The student exception was enacted in 1939 as an amend-
ment to the 1935 Social Security Act, see Internal Revenue
Code of 1939, § 1426(b)(10)(iii), 53 Stat. 1360, 1385 (1939),
and at that time Congress also enacted a specific FICA
exception for medical interns. Subsequently codified at
former 26 U.S.C. § 3121(b)(13) (1964), the intern exception
exempted from FICA taxation “services performed as
an interne [sic] in the employ of a hospital by an
individual who has completed a four year[ ] course in a
medical school chartered or approved pursuant to State
Law.” Internal Revenue Code of 1939, § 1426(b)(13), 53 Stat.
1360, 1385 (1939). The intern exception established a
categorical FICA exemption for services rendered by
No. 07-1838 11
medical interns.2
In 1965 Congress repealed the intern exception. See Social
Security Amendments of 1965, Pub. L. No. 89-97, § 311, 79
Stat. 286, 381 (1965). The government cites certain state-
ments in House and Senate Reports reflecting congressio-
nal concern about Social Security coverage for “young
doctors” and their families. The government views the
legislative history surrounding the repeal of the intern
exception as broadly establishing congressional intent
regarding medical residents, who are also “young doctors.”
The government contends that the repeal of the per se
exception for interns must be understood to mean that
Congress intended both interns and medical residents to
be per se ineligible for the student exception.
This argument relies on non sequiturs. The 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.
Moreover, UCH notes a statement in the House Report
accompanying the repeal of the intern exception that
2
In 1964 the Sixth Circuit held that the intern exception did not
apply to medical residents because of the distinctions between
interns and residents that existed in 1939. St. Luke’s Hosp. Ass’n
v. United States, 333 F.2d 157, 161 (6th Cir. 1964). The court noted
that the differences between interns and residents had since
become “blurred,” but held nonetheless that residents were
not eligible for the per se intern exemption. Id. at 164. The
court’s opinion did not discuss the student exception.
12 No. 07-1838
leaves open the possibility that interns might qualify for
other FICA exemptions: “The effect of this amendment
[repealing the intern exception] is to extend coverage
under the Federal Insurance Contributions Act to such
interns unless their services are excluded under provisions
other than section 3121(b)(13).” H.R. R EP. N O . 89-213, 216
(1965), reprinted in 1965-2 C.B. at 747 (emphasis added).
We need not, in any event, attempt to reconcile the
statutory and legislative history of the intern exception
with the student exception, § 3121(b)(10), or the applicable
Treasury Regulation, § 31.3121(b)(10)-2. For the reasons
we have already stated, the statute unambiguously does
not categorically exclude medical residents from eligibility
for the student exception. To the extent the statute is
ambiguous, the regulation calls for a case-specific test for
eligibility that focuses on the character of the employing
organization as a school, college, or university, and its
relationship with the employee claiming student status.
The regulation reflects a permissible construction of the
statute (the government does not argue otherwise) and is
plainly applicable here, the government’s argument about
the repeal of the intern exception notwithstanding.
Accordingly, we join the Eleventh Circuit in holding that
the student exception, § 3121(b)(10), is not per se inapplica-
ble to medical residents as a matter of law; rather, a case-
by-case analysis is required to determine whether medical
residents qualify for the statutory exemption from FICA
taxation. Mount Sinai Med. Ctr., 486 F.3d at 1253; see also
Minnesota v. Apfel, 151 F.3d 742, 748 (8th Cir. 1998) (reach-
ing a similar conclusion regarding medical residents at a
No. 07-1838 13
state hospital, construing a student exception contained
in an agreement between the State of Minnesota and the
Commissioner of Social Security pursuant to 42 U.S.C.
§ 418(a)(1)). The judgment of the district court is A FFIRMED.
9-23-08