Appeal from the United States District Court for the District of South Dakota.
The opinion of the court was delivered by: Riley, Chief Judge.
Before RILEY, Chief Judge, CLEVENGER*fn1 and COLLOTON, Circuit Judges.
The Center for Family Medicine (CFM) and the University of South Dakota School of Medicine Residency Corporation (Residency Corporation) (collectively, appellants) filed a lawsuit against the United States of America (government), seeking a refund for Federal Insurance Contributions Act (FICA) taxes the Internal Revenue Service (IRS) assessed and collected on stipends appellants paid to medical students. After the district court*fn2 denied the government's first and second motions for summary judgment and granted appellants' cross-motion for summary judgment, appellants moved for attorney fees from the government pursuant to 26 U.S.C. § 7430. The district court granted in part, and denied in part, appellants' motion, finding appellants were entitled to attorney fees with respect to the government's first summary judgment motion, but not for the subsequent cross motions. Appellants appeal the district court's partial denial of their motion, and we affirm.
Appellants brought an action against the government, alleging the IRS erroneously assessed and collected FICA taxes on stipends paid to medical students in appellants' residency programs for all tax years from 1995 to 2003 inclusive. Appellants claimed the stipends were exempt from FICA taxes pursuant to 26 U.S.C. § 3121(b)(10). FICA taxes are not assessed on wages earned for:
(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 connection with such school, college, or university, unless it is a school, college, or university of a State or a political subdivision thereof and the services performed in its employ by a student referred to in section 218(c)(5) of the Social Security Act are covered under the agreement between the Commissioner of Social Security and such State entered into pursuant to section 218 of such Act; 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 exception).
The government filed a motion for summary judgment, arguing the student exception did not apply to the medical residents employed by appellants. The government declared "as a matter of law, medical residents... are covered by the social security system, and they (and their employers) are subject to social security taxes."
The district court denied the government's motion. Relying on Minnesota v. Apfel, 151 F.3d 742 (8th Cir. 1998), the district court determined Eighth Circuit precedent prohibited the bright-line rule urged by the government that medical residents could never qualify for the student exception. In Apfel, our court concluded the student exception*fn3 contemplates a case-by-case examination to determine if an individual's relationship with a school is primarily for educational purposes or primarily to earn a living. The Commissioner cannot avoid such a case-by-case examination by summarily concluding that medical residents are never students regardless of the nature of their relationship with their employer.
After appellants each filed motions for summary judgment, arguing they were entitled to a refund of the FICA taxes as a matter of law, the government responded by filing a second summary judgment motion. This time, the government argued the student exception did not apply to the medical students in appellants' residency programs, not as a matter of law, but because (1) the patient care provided by these specific residents was not "incident to and for the purpose of pursuing a course of study at a school, college or university" because the residents performed these services up to 70 hours per week; and (2) the residents were not employed by schools, ...