## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 97-1845

___________

Ansar H. Ahmed; Andrew Matthews, * M.D.; Laura L. Schmitz, M.D.; Taylor * E. Neff, M.D.; Steven M. Falk, M.D.; * David R. Hardten, M.D.; John C. * Lillehei, M.D.; William G. Nelson, * M.D.; Susan F. Sencer, M.D.; James B. * Redmon, M.D.; William C. Heegaard, * M.D.; N. Judge King, M.D.; Kevin R. * Walker, M.D.; Kenneth K. Maslonka, * M.D.; Stephanie A. Hedstrom, M.D.; * Appeal from the United States Kristen J. Paddon, M.D.; Daniel D. * District Court for the Zimmerman, M.D.; Margaret B. Zander, * District of Minnesota. M.D.; David J. Slomiany, M.D.; * Barbara P. Strohbehn, M.D.; Scott E. * Julian, M.D.; Matthew P. Jones, M.D.; * James D. Walter, M.D.; Terry R. * Bowers, M.D.; Thomas Knickelbine, * M.D.; David Shafran, M.D.; Michael T. * Valley, M.D.; Kathryn Lefper, M.D.; * Mary D. Rathgaber, M.D.; Kwan Cho, * M.D.; Richard J. Gordon, M.D.; * Michael P. McNevin, M.D.; Rosario * Del Maria Crau, M.D.; Jerry J. Blow, * M.D.; Eduardo Esper, M.D.; John K. * Randall, M.D.; Michael K. Case, M.D.; * Deepak M. Kamat, M.D.; James J. * Schuh, M.D.; Katherine M. Clinch, * M.D.; Christoph A. Friedrich, M.D.; * Jeffrey D. Larsen, M.D.; Scott W. *-2-

Rathgaber, M.D.; David M. Leon, * M.D.; William J. Wengs, M.D.; Sanjay * R. Parikh, M.D.; Gregory C. Reuter, * M.D.; Gregory L. Miller, M.D.; Michael * H. Ryan, M.D.; Philip L. Prosapio, * M.D.; Thomas E. Nelson, M.D.; Richard* A. Stangler, M.D.; Richard J. Fischel, * M.D.; Joseph E. Dohar, M.D.; David A. * Gross, M.D.; Kathryn L. Pyzdrowski, * M.D.; John A. Faber, M.D.; Scott A. * Gruber, M.D.; Maureen C. Holasek, * M.D.; Nancy G. Silvis, M.D.; Eugenio * Guzman, M.D.; Craig R. Peterson, * M.D.; David J. Fang, M.D.; Gary L. * Clayman, M.D.; Pradeep Singh, M.D.; * Alan J. Bank, M.D.; Nigel S. Key, * M.D.; Kenneth L. Brayman, M.D.; * Thomas F. Tuttle, M.D.; Michelle M. * Tichey, M.D.; Wesley R. Grootwassink, * M.D.; Christopher Carlson, M.D.; * Rodney J. McCutcheon, M.D.; Lee A. * Johnson, M.D.; Suzanne M. Powell, * M.D.; Sharon R. May, M.D.; Durand E. * Burns, M.D.; Danl P. McCormick, * M.D.; Nabat Jetha, M.D.; Paul R. Rust, * M.D.; Audrey A. Caine, M.D.; Mitchell * T. Wallin, M.D.; Keith P. Dahlhauser, * M.D.; Raj P. Terkonda, M.D.; Jamshid * Niknam, M.D.; Antonio Gil-Nagel, * M.D.; Paul E. Savoca, M.D.; Jon W. * Jones, M.D.; Timothy R. Olsen, M.D.; * Rafael O. Hernandez, M.D., *
* Appellants, *
*
v. *
*The HONORABLE RICHARD W. GOLDBERG, Judge, United States Court 1 of International Trade, sitting by designation.
-3- United States of America, *
* Appellee. *

___________ Submitted: March 12, 1998 Filed: July 17, 1998

___________ Before WOLLMAN and HANSEN, Circuit Judges, and GOLDBERG, Judge. 1

___________ WOLLMAN, Circuit Judge.

The appellants (the residents), a group of former medical residents at th e University of Minnesota Medical Center, appeal from an order of the district court dism issing their action seeking refund of Federal Insurance Contributions Act (FICA ) taxes paid to the United States. We affirm, although for a reason different from tha t relied upon by the district court.

I.
The social security system is essentially “a form of social insurance . . . whereby persons gainfully employed, and those who employ them, are taxed to permit th e payment of benefits to the retired and disabled, and their dependants.” Flemming v

. Nestor , 363 U.S. 60 3, 609 (1960). Among the various taxes supporting the system are FICA taxes, also known

as social security taxes. Under section 3101(a) of the Internal Revenue Co de, FICA taxes are imposed on “wages” received by individuals “with respect to employment.” 26 U.S.C. § 3101(a). These taxes are to be collected by-4-

employers by withholding the proper amount from the wages of their employees. See 26 U.S.C. § 3102(a). Employers are required to pay FICA taxes in an amount identical to that withheld from the wages of their employees. See 26 U.S.C. § 3111(a). Thus, FICA taxes are “paid in part by employees through withholding, and in part by employer s throu gh an excise tax.” United States v. Lee , 455 U.S. 252, 254 n.1 (1982) (citatio n omitted).
Unlike private employees, empl oyees of states and their political subdivisions are not compelle d to participate in the social security system and thus are not subject t o
ma ndatory FICA taxes. See 26 U.S.C. § 3121(b)(7). However, states may voluntarily participa te in the system by executing an agreement (section 418 agreement) with th e Commissioner

of Social Security. See 42 U.S.C. § 418(a)(1). If a state chooses thi s route, empl oyees that fall within the scope of the agreement become subject to th e payment of FICA taxes, as does the employing state agency. In 1955, the State o f Minnesota executed a section 418 agreement identifying certain limited coverage groups of state employees. This agreement was modified in 1958 to add employees of th e University of Minnesota as an additional coverage group.
For more than thirty y ears after this modification, the University did not withhold FICA taxes from stipends paid to medical r esidents enrolled in the University’s graduate medical education program, nor did it pa y the employer’s portion of FICA taxes on such stipends. This failure to withhold reflected the Univer sity’s belief that the residents were not included in the coverage group identified in the 1958 modification. On September 13, 1990, the Social Security Administration issued an assessment determining that the University’s f

ailure to withhold had been improper and that the State of Minnesota was therefore liable for nearly $8 million in unpaid social security contributions attributable to the years 1985 and 1986. Although the StateThe State initially sought review on administrative appeal, but the Commis sioner 2 aff irmed the assessment without modification. The State then filed a civil action i n district court seeking a redetermination of the assessment. The district court granted summary judgment to the State, holding that the residents’ stipends were not subject to withholding and that the assessment was invalid. We recently affirme d that decision. See State of Minnesota v. Apfel , No. 97-3141, slip. op. (8th Cir. July 6, 1998). The U niversity’s administrative claim was still pending on this date. O n 3 December 5, 1996, the IRS issued a tentative disallowance of the University’s claim. Section 530 is not codified as part of the Internal Revenue Code and appear s 4 only in the notes following 26 U.S.C. § 3401.
-5- challeng ed this assessment, the University elected to withhold FICA taxes from th e 2 residents’ stipends beginning on Octob er 1, 1990, and continuing through December 31, 1991. The University then ceased this practice and on July 12, 1993, filed a timel y refun d claim with the Internal Revenue Service (IRS) seeking refund of the employer’s share of F ICA taxes paid during the period of withholding. In addition, because th e residen ts had authorized the University to file administrative claims on their behal f pursuant to 26 C.F.R. 31.6402(a)-2(a)(2)(i), the University also sought refund of th e employee share of FICA taxes withheld from October 1, 1990, to December 31, 1991. In support of its refund claim, the University contended that: (1) the residents were not covered em

ployees under the terms of the 1958 modification; and (2) even if they were otherwise covered, the residents were excluded under the modification’s studen t exclusion.

On March 28, 1996, the resident s, frustrated by a perceived lack of progress and 3 desirous of asserting an addi tional ground for relief, commenced a civil action in district court pursuan t to 26 U.S.C. § 7422 asserting that they were entitled to a refund unde r Section 530 of the Revenue Act of 1978, 26 U.S.C. § 3401 note (section 530). Th e 4 governme nt

moved for dismissal or, in the alternative, for summary judgment. O n January 6, 1997, the district court issued an order granting the government’s motion-6-

a n d dismissing the residents’ action with prejudice. The court concluded that it lacked jurisdiction over the residents’ claims because the residents had failed to comply with section 7422(a), which

requires that an administrative refund claim precede the filing of a refund suit in federal court. The residents now appeal.

II.
Section 7422(a) of the Internal Revenue Code provides:

No su it prior to filing claim for refund. -- No suit or proceeding shall b e maintained in any court for the rec overy of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed tohave been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to th e provision s of law in that regard, and the regulations of the Secretary established in pursuance thereof.

26 U.S.C. § 74 22(a). This section “imposes, as a jurisdictional prerequisite to a refund suit, filing a refund claim with the IRS that complies with IRS regulations.” Chicag o Milwaukee Cor p. v. United States , 40 F.3d 373, 374 (Fed. Cir. 1994). The pertinen t regulations are set forth at 26 C.F.R. § 31.6402(a)-2. Under these regulations, a n employee may pursue an administrative refund claim in one of two ways. The employee may file an individual administrative refund claim, but only if “the employee does no t receive reimbursement in any manner from the employer and does not authorize th e employer to file a claim and receive refund or credit.” 26 C .F.R. § 31.6402(a)-2(b)(1)(i). Alternatively, an employee may authorize his e mployer to file an administrative claim on his behalf by providing the employer with written consent “to th e allowance of the refund

or cr edit.” 26 C.F.R. 31.6402(a)-2(a)(2)(i). In addition, the employer must submit a statement stating “that the employer ha s obtained from the employee a written statement (a) that the employee has not claimed refund or-7-

cre dit of the amount of the overcollection . . . and (b) that the employee will not clai m refund or credit of such amount.” 26 C.F.R. § 31.6402(a)-2(a)(2)(ii).

The district court held that because they had not filed individual administrativ e claims but ha d instead authorized the University to seek a refund on their behalf, th e residents failed to satisfy section 7422(a). The district court conc luded that the residents’ partial compliance with the regulations was insufficient:

Alth oughthe University appropriately filed the “employer claim,” [th e residents] may not create a hybrid of requirements and argue th at the Statute has been satisfied. They cannot comply with half of the employee filin g requ irements and half of the employer filing requirements and then assert tha t this conduct, as a whole, meets the requirements of the Statute. Such
a rea ding of the Regulations ignores the distinction between the employee and emp loyer filing requirements and renders meaningless [the residents’] statements that they would not file claims.

Ahmed v. United States , 1997 WL 151974 *3 (D. Minn. Jan. 6, 1997).
Section 7422(a) requires only that the civil action be preceded by a n administrative claim and that the administrative claim comply with the regulations. The purpose of this requirement is to ensure that p arties seek administrative remedies before bringing suit in federal cou rt. Here, the residents did just that -- an administrative claim was filed o n their behalf nearly three years before they filed the present action. However unorthodox (or hybrid, to use the district court’s description) the nature of the administrative claim, it was sufficient to satisfy the fair notice requirements of section 7422(a).

The government makes much of the fact that the residents, when authorizing the University to proceed on their behalf, were required to execute a written statemen t indicating that they would “not claim refund or credit of such amount.” 26 C.F.R. §“We may a ffirm the district court’s decision on any ground supported by th e 5 record.” Wald v. Southwestern Bell Corp. Customcare Med. Plan , 83 F.3d 1002, 1005 (8th Cir. 1996).
-8- 31.6402( a)-2(a)(2)(ii)(b). The government argues that the term “claim” should b e constru ed broadly to include not only administrative claims for refund but also civi l acti ons for a refund. Thus, the government argues that by executing this statement, the residents voluntarily relinquished their right to file suit in federal court. However, thi s reading of the term “ claim” ignores the context in which it appears. The procedures set forth in 26 C.F.R. § 31.6 402(a)-2 govern the filing of administrative claims and have no application outside the administrative arena. Thus, the residents’ failure to file individual administrative claims does not preclude their bringing an action under section 7422(a).

III.
Although we conclude that the district court erred in dismissing the action o n jurisdictional grounds, the dismissal can be affirmed on another ground. As indicated 5 above, the residents base their claim for relief upon section 530 of the Revenue Act of 1978. Section 530 was enacted by Congress “to alleviate what was perceived as overly

zea lous pursuit and assessment of taxes and penalties against employers who had, i n good faith, mis classified their employees as independent contractors.” Boles Trucking, Inc. v. Unite d States , 77 F.3d 236, 239 (8th Cir. 1996). Section 530 provides, i n pertinent part:
(a) Termination of certain employment tax liability. -- (1) In general. -- If -- (A) for purposes of employment taxes, the taxpayer did no t treat an individual as an employee for any period, and (B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be-9-

filed by the taxpayer with respect to such individual for such p eriod are filed on a basis consistent with the taxpayer’s treatment of such individual as not being an employee, then for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be a n employee unless the taxp ayer had no reasonable basis for not treating such individual as an employee.

Secti on530(a), 26 U.S.C. § 3401 note. Thus, section 530 allows employers to avoi d liability for past-due employment taxes when the employer erroneously but reasonably classif iedemployees as independent contractors rather than employees. See Standar d Office Bldg. Corp. v. United States , 819 F.2d 1371, 1382 (7th Cir. 1987).
By its very terms, section 530 is a relief provision available o nly to employers who

erroneous lyclassify their employees. Section 530 applies if (1) the taxpayer does no t treat a worker as an employee for employment tax purpose during a particular period; (2) the taxpayer files all required federal employment tax returns on a basis consistent with this treatment; and (3) the taxpayer has a reasonable basis for not treating the worker as

an empl oyee. See Springfield v. United States , 88 F.3d 750, 753 (9th Cir. 1996). I f these requirements are satisfied, tax liability is ter minated “for purposes of applying such taxes for such period with respect to the taxpayer .” SeeSec tion 530(a)(1)(B), 26 U.S.C. § 3401 note (emphasis supplied). Notwithstanding the clar ity of the statute, the residents contend that a broad interpretation of the term “taxpayer” is appropriate b ecause they are, at least in a general sense, “taxpayers.” We do not agree, for the focus of section 530 is on the taxpa

yer’s treatment of the taxpayer’s employees. In this context, it is clear that the term “taxpayer” refers only to employers and not to employees.

Furthermore, even if section 530 were construed to authorize relief for employees

as wel l as employers, the residents’ claim would remain baseless. The language o f subsections (a)(1)(A) and (a)(1)(B) limits application of section 530 to-10-

those situations in which an employer failed to treat an individual as an employee during the particular period in question. Here, on the other hand, the taxes that the resident s alleg e they overpaid were collected because the University did treat the residents a s employees during the period in question by withholding FICA taxes from their stipends. The re sidents nevertheless insist that because the University did not treat them a s employees “for any period,” their employment tax liability has been forever terminated. Section 530 does not confer eternal immunity from employment tax liability, however; it merely eliminates liability for those discrete p eriods of time during which the employer erroneously but reasonably failed to treat an individual as an employee.

We conclude that because se ction 530 does not provide a basis upon which relief can be granted, the residents’ claim should have been dismissed on this ground. See Fed. R. Civ. P. 12(b)(6).
As a final matter, we note that both the government and the resident s agree that the district court erred in dismissing the suit with prejudice because the dismissal was based

onjurisdictional grounds. Under Rule 41(b) of the Federal Rules of Civil Procedure , dism issal for lack of jurisdiction is not an adjudication on the merits and thus such a dismissal should

be without prejudice. See Johnson v. Boyd-Richardson Co. , 650 F.2d 147, 148 (8th Cir. 1981) (“wh en a dismissal is for ‘lack of jurisdiction,’ the effect is not an adjudication on the merits”). Howev er, under the same rule, a dismissal for failure to state a cla im upon which relief can be granted is an adjudication on the merits. Se e Federated Department Stores, Inc. v. Moitie 452 U.S. 394, 399 n.3 (1981). Given our holding that the residents have not stated a claim under section 530 that is the effect of the dismissal here.Nothing in our opinion should be construed as precluding the residents fro m 6 ultima tely recovering their respective share of FICA taxes in the University’ s administrative claim or in any civ il action subsequently commenced by the University.
-11- The judgment is affirmed. 6

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.