The opinion of the court was delivered by: Karen E. Schreier Chief Judge
ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR ATTORNEYS' FEES
Plaintiffs, Center for Family Medicine (CFM) and University of South Dakota School of Medicine Residency Corporation (USDSMRC), filed this suit seeking the recovery of FICA taxes erroneously collected by the Internal Revenue Service on stipends paid to medical residents. On September 24, 2008, stipulations for entry of judgment were filed by all parties in the above captioned case. Docket 187, 188. That same day, the court filed stipulated judgments in favor of CFM and USDSMRC. Docket 190, 191. Both plaintiffs now move for an award of attorneys' fees and costs.
26 U.S.C. § 7430 provides for awards of attorneys' fees and costs for the "prevailing party" in actions "against the United States in connection with the determination, collection, or refund of any tax." 26 U.S.C. § 7430(a)(2). The prevailing party is the party who "(I) has substantially prevailed with respect to the amount in controversy, or (II) has substantially prevailed with respect to the most significant issue or set of issues presented." Id. at § 7430(c)(4)(A)(i). On August 17, 2006, this court denied the United States' motion for summary judgment. Docket 34. On August 6, 2008, this court denied the United States' second motion for summary judgment, and it granted in part and denied in part motions for summary judgment filed by CFM and USDSMRC. Docket 176. Upon stipulations filed by the parties, the court signed a stipulated judgment in favor of CFM in the amounts of $628,517.45 plus interest and $591,905.70 plus interest. Docket 190. A stipulated judgment was also signed in favor of USDSMRC, awarding plaintiff $1,047,962.44 plus interest and $712,548.20 plus interest. Docket 191. The United States does not dispute plaintiffs' contention that they substantially prevailed both regarding the amount in controversy and the most significant issues presented.
Awards are further limited "with respect to any portion of the administrative or court proceeding during which the prevailing party has unreasonably protracted such proceedings." Id. at § 7430(b)(3). Finally, a party seeking attorneys' fees and litigation costs must have exhausted all available administrative remedies before beginning any court proceeding. Id. at § 7430(b)(1). The United States does not contest the fact that CFM and USDSMRC exhausted administrative remedies and does not assert that plaintiffs have unreasonably protracted these proceedings.
A party's recovery of attorneys' fees is not allowed, however, "if the United States establishes that the position of the United States in the proceeding was substantially justified." 26 U.S.C. § 7430(c)(4)(B)(i). The United States maintains that its positions in this matter were substantially justified, thus prohibiting an award of attorneys' fees to either plaintiff. Docket 214, 215. Therefore, the sole issue before this court is whether the position of the United States was substantially justified under 26 U.S.C. § 7430(c)(4)(B)(i).
The burden is on the United States to demonstrate that its legal positions were substantially justified. 26 U.S.C. § 7430(c)(4)(B)(i); Sherbo v. C.I.R., 255 F.3d 650, 653 (8th Cir. 2001). "[A] position was substantially justified if it had a reasonable basis in law or fact." Dowdy v. United States, 1999 WL 1424996, *2 (E.D. Ark. Nov. 3, 1999) (citing Cox. v. Comm'r, 121 F.3d 390, 393 (8th Cir. 1997)). "Stated another way, the government's position is not substantially justified where its position is not 'clearly reasonable, well founded in law and fact, [or] solid though not necessarily correct." Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991) (citation omitted). In determining whether the United States' position was substantially justified, "the court shall take into account whether the United States has lost in courts of appeal for other circuits on substantially similar issues." Id. at § 7430(c)(4)(B)(iii).
A. First Motion for Summary Judgment
In its first motion for summary judgment, the United States urged the court to find that, as a matter of law, medical residents can never fit within the "student exception" exempting them from payment of FICA taxes on stipends paid to them during their medical residency. Docket 21. In its order denying the motion for summary judgment, this court determined that "the law in the Eighth Circuit prohibits such a bright line rule." Docket 34, page 4-5. Citing Minnesota v. Apfel, this court stated that it could not adopt the bright-line rule sought by the United States because the Eighth Circuit held that application of the FICA "student exception" is a question of fact to be determined on a case-by-case basis by examining the relationship between the resident and the university. Id. at 7 (citing Apfel, 151 F.3d 742, 747-48 (8th Cir. 1998)); see also United States v. Mayo Found. for Med. Educ. & Research, 282 F. Supp. 2d 997, 1006-07 (D. Minn. 2003) (citing Apfel in rejecting the United States' argument that "as a matter of law, residents can never be exempt, as 'students' from FICA taxation"). Because the Eighth Circuit rejected the bright-line ruling requested by the United States in Apfel, this court was bound to similarly reject the United States' contention here that medical residents can never be students. Docket 34, page 8.
As mentioned above, a court determining whether the United States' position was substantially justified "should take into account whether the United States has lost in courts of appeal for other circuits on substantially similar issues." 26 U.S.C. § 7430(c)(4)(B)(iii). At the time the United States was presenting its positions, two courts of appeal, including the Eighth Circuit, had found adverse to the United States' contention that the statute required a bright-line rule. See United States v. Mt. Sinai Med. Ctr. of Florida, 486 F.3d 1248, 1253 (11th Cir. 2007); Apfel, 151 F.3d at 748. Further, recent decisions by several courts of appeal, filed since this court entered judgments in this case, support the contention that the application of the student exception requires a case-by-case factual analysis. See United States v. Mem'l Sloan-Kettering Cancer Ctr., 563 F.3d 19, 27 (2d Cir. 2009) (stating that "whether medical residents are 'students' and the Hospitals 'schools' is a question of fact, not a question of law"); United States v. Detroit Medical Center, 557 F.3d 412, 418 (6th Cir. 2009) (stating that while the definition of "student" is a legal issue, whether residents in a specific program come within the term is not); Univ. of Chicago Hospitals v. United States, 545 F.3d 564, 570 (7th Cir. 2008). Because the United States' first motion for summary judgment asked this court to rule in a way that was directly contrary to binding Eighth Circuit precedence, the court concludes that the United States' position was not substantially justified. Thus, under 26 U.S.C. § 7430, plaintiffs are entitled to an award of attorneys' fees for work generated in response to this motion for summary judgment.
B. Second Motion for Summary Judgment
In its second motion for summary judgment, the United States argued that the medical residents were not "students" for purposes of the student exception because the patient care they provided was not incident to a course of study. Docket 151, page 7-16. Additionally, the United States argued that the student exception did not apply because their employer was a health care provider, not a school, college, or university. Id. at 17-28. The United States advanced similar arguments in its opposition to plaintiffs' motions for summary judgment, which were filed at the same time, asserting that there were disputed facts with regard to the appropriateness of an assessment of FICA taxes. See Docket 167, 169.
As stated above, the Eighth Circuit has held that courts are to evaluate on a case-by-case basis whether the student exception applies to medical residents, relying on the unique facts of each case to determine "if an individual's relationship with a school is primarily for educational purposes or primarily to earn a living." Apfel, 151 F.3d at 748. Here, the United States argued that very question--whether the student exception applied in light of the unique relationship between CFM and USDSMRC and the medical residents. See Docket 151, 167. Applying the relevant statutes and regulations to the facts of this case, the court found in favor of plaintiffs and determined that the student exception applied to medical residents employed by CFM and USDSMRC. Despite the court's adverse ruling, however, the United States did have a reasonable basis in fact to argue that plaintiffs were not employers, that plaintiffs were not schools, and that the medical residents were not students. Thus, the United States was substantially justified in advocating for a favorable interpretation of the undisputed facts in light of applicable rules and statutes. See Sherbo v. C.I.R., 255 F.3d 650, 655 (8th Cir. 2001) (holding that it was reasonable for the United States to litigate when there were "dispositive and unresolved fact[s]" as to the taxpayer's liability); Dowdy v. United States, 1999 WL 1424996, *2-3 (E.D. Ark. Nov. 3, 1999) (finding that United States' ...