In the

United States Court of Appeals

For the Seventh Circuit

No. 07-1838

UNIVERSITY OF CHICAGO HOSPITALS,

Plaintiff-Appellee,

v.

UNITED STATES OF AMERICA,

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.

ARGUED OCTOBER 23, 2007—DECIDED SEPTEMBER 23, 2008

Before BAUER, CUDAHY, and SYKES, Circuit Judges.

SYKES, 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 government’s motion for summary judgment on the question

of whether medical residents are categorically not “students” 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 exception 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 Treasury 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 exception—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 employeestudents. 
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 medicaleducation 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 residents to take classes in the form of lectures and demonstrations, 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,

h t t p :/ / w w w . a c g me. o r g / a c W e b s it e / n e w sR o o m /

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 government 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 “summary 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 exception,” 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 connection 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 purposes of the student exception. And medical-school

graduates participating in postgraduate medical residencies 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 exception. 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 history—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 argument, 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 concluded 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 ineligible 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 construction 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 regulation 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

The government’s argument in this regard makes it unneces- 1

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 (discussing the difference between tax regulations promulgated

pursuant to specific and general statutory grants of authority).

it, never mind the question of its entitlement to deference.1

Again, the government’s argument proceeds from inferences 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 concludes, 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 considered 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 maintains 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
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. Accordingly, 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 amendment 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

In 1964 the Sixth Circuit held that the intern exception did not 2

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.

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 statements in House and Senate Reports reflecting congressional 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
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. REP. NO. 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 inapplicable to medical residents as a matter of law; rather, a caseby-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) (reaching 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 AFFIRMED.

9-23-08