                     United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                   ___________

                                   No. 09-2780
                                   ___________

Center for Family Medicine, a South     *
Dakota Corporation; University of       *
South Dakota School of Medicine         *
Residency Corporation, a South          *
Dakota Corporation,                     *
                                        * Appeal from the United States
             Appellants,                * District Court for the
                                        * District of South Dakota.
      v.                                *
                                        *
United States of America,               *
                                        *
             Appellee.                  *
                                   ___________

                             Submitted: June 16, 2010
                                Filed: July 30, 2010
                                 ___________

Before RILEY, Chief Judge, CLEVENGER1 and COLLOTON, Circuit Judges.
                               ___________

RILEY, Chief Judge.

      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


      1
      The Honorable Raymond C. Clevenger, III, United States Circuit Judge for the
Federal Circuit, sitting by designation.
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 court2 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.

I.    BACKGROUND
      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


      2
       The Honorable Karen E. Schreier, Chief Judge, United States District Court for
the District of South Dakota.

                                         -2-
              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 exception3

      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.

Id. at 748.


      3
        Apfel concerned the “student exception” found at 42 U.S.C. § 410(a)(10).
Apfel, 151 F.3d at 747. The applicable statutory language in § 410(a)(10) is identical
to the language contained in 26 U.S.C. § 3121(b)(10), although Apfel did rely heavily
on the Social Security regulations implementing the student exception, 20 C.F.R.
§ 404.1028(c). Id. at 748.

                                         -3-
       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, colleges,
and universities but “were employed by hospitals, clinics, and individual doctors’
practices . . . which funded the cost of the residents’ stipends and benefits.”

      The district court again denied the government’s motion, and granted in part,
and denied in part,4 appellants’ cross-motions, finding appellants were entitled to a
refund of erroneously collected FICA taxes. The district court entered stipulated
judgments, awarding CFM $628,517.45 plus interest for its employer contribution and
$591,905.70 plus interest for its employee contribution, and Residency Corporation
$1,047,962.44 plus interest for its employer contribution and $712,548.20 for its
employee contribution.

        Appellants then moved for attorney fees and costs pursuant to 26 U.S.C.
§ 7430. Under § 7430, a prevailing party in a lawsuit concerning tax refunds may be
awarded reasonable litigation costs, including attorney fees paid or incurred. See 26
U.S.C. § 7430(a)(2) and (c)(1)(B)(iii). “The term ‘prevailing party’ means any party
. . . which—(I) has substantially prevailed with respect to the amount in controversy,
or (II) has substantially prevailed with respect to the most significant issue . . . .” Id.
at § 7430(c)(4)(A)(i). However, “[a] party shall not be treated as the prevailing party

      4
      The district court denied appellants’ motion with respect to “chief residents”
who had elected to stay on after the completion of the residency program and helped
to administer the residency program.

                                           -4-
in a proceeding . . . if the United States establishes that the position of the United
States in the proceeding was substantially justified.” Id. at § 7430(c)(4)(B)(i).

       The district court granted appellants’ motion in part and denied it in part. The
district court awarded appellants attorney fees with respect to the government’s first
summary judgment motion, finding the government’s position in that motion was not
substantially justified because the government had “asked [the district] court to rule
in a way that was directly contrary to binding Eighth Circuit preceden[t].” The district
court denied appellants’ motion for attorney fees with respect to the subsequent cross-
motions for summary judgment, holding the government’s position in the subsequent
motions “was substantially justified.” The district court declared, “Despite the court’s
adverse ruling [on the cross-motions for summary judgment], . . . the United States
did have a reasonable basis in fact to argue that [appellants] were not employers, that
[appellants] were not schools, and that the medical residents were not students.”

       Appellants now challenge the district court’s partial denial of their motions for
attorney fees.5


      5
        The government also appealed the district court’s grant of partial summary
judgment in favor of appellants and the award of attorney fees. In March 2010, the
IRS announced it “has made an administrative determination to accept the position
that medical residents are excepted from FICA taxes based on the student exception
for tax periods ending before April 1, 2005.” The government thereafter withdrew all
of its appeals in this case.

       Effective April 1, 2005, the IRS regulations were amended. See 26 C.F.R.
§ 31.3121(b)(10)-2(f). The new regulations, which do not apply to this case, provide
that medical residents who work 40 hours or more per week are considered full-time
employees and do not qualify for the student exception. See id. at § 31.3121(b)(10)-
2(d)(3)(iii). However, on June 1, 2010, the Supreme Court granted a petition for writ
of certiorari in Mayo Found. for Med. Educ. & Research v. United States. See __
S. Ct. __, No. 09-837, 2010 WL 149135 (June 1, 2010). The petition presents the
following question: “Whether the Treasury Department can categorically exclude all

                                          -5-
II.    DISCUSSION
       Appellants claim the district court erred in partially denying their motion for
attorney fees based on the court’s finding the government’s position in its second
motion for summary judgment, and in opposition to appellants’ summary judgment
motions, was substantially justified. We review a district court’s denial of a motion
for attorney fees pursuant to 26 U.S.C. § 7430 for abuse of discretion. See United
States v. Bisbee, 245 F.3d 1001, 1007 (8th Cir. 2001).

        “The position of the United States is substantially justified if it has a reasonable
basis in both law and fact, a determination made on a case by case basis.”
Kaffenberger v. United States, 314 F.3d 944, 960 (8th Cir. 2003) (quoting Bisbee, 245
F.3d at 1007) (internal quotation marks omitted); see also Pierce v. Underwood, 487
U.S. 552, 565 (1988) (“We are of the view, therefore, that as between the two
commonly used connotations of the word ‘substantially,’ the one most naturally
conveyed by the phrase before us here is not ‘justified to a high degree,’ but rather
‘justified in substance or in the main’—that is, justified to a degree that could satisfy
a reasonable person.”). The government has the burden to establish its position was
substantially justified. See 26 U.S.C. § 7430(c)(4)(B)(i) (“A party shall not be treated
as the prevailing party . . . if the United States establishes that the position of the
United States in the proceeding was substantially justified.” (emphasis added)).6


medical residents and other full-time employees from the definition of ‘student’ in 26
U.S.C. § 3121(b)(10), which exempts from Social Security taxes ‘service performed
in the employ of a school, college, or university’ by a ‘student who is enrolled and
regularly attending classes at such school, college, or university.’”
       6
        Apparently relying on an earlier version of 26 U.S.C. § 7430, other panels of
this court have concluded the burden of proof is on the taxpayer to show the
government’s position was not substantially justified. See, e.g., Kaffenberger, 314
F.3d at 960 (“The taxpayer bears the burden of proving that the government’s
litigation position was not substantially justified.” (quoting Bisbee, 245 F.3d at
1007)). However, “[a] 1996 amendment to the statute explicitly placed the burden of
proof on this issue on the government when it added § 7430(c)(4)(B).” Sherbo v.
Comm’r, 255 F.3d 650, 653 (8th Cir. 2001).

                                            -6-
       Appellants contend the government’s position in its second summary judgment
motion, and in opposition to appellants’ motions, was not substantially justified
because (1) the government continued to advocate a “bright-line” rule that medical
residents could never qualify for the student exception, contrary to Apfel and United
States v. Mayo Found. for Med. Educ. & Research, 282 F. Supp. 2d 997 (D. Minn.
2003) (Mayo I); (2) Mayo I foreclosed the government’s argument that hospitals,
rather than the appellants, employed the medical residents; and (3) the government’s
contention that CFM was not a school contravened IRS regulations.

       Having carefully reviewed appellants’ arguments, we conclude the district court
did not abuse its discretion by denying in part appellants’ motions for attorney fees.
First, like the district court, we disagree with appellants’ contention that the
government continued to push for a bright-line rule in its second motion for summary
judgment. When read in its entirety and in proper context, it is clear the government
engaged in the case-by-case factual analysis Apfel requires.

        Appellants’ second argument—that the government was not substantially
justified in arguing hospitals, rather than the appellants, were the medical residents’
employers—relies heavily on the analysis in Mayo I. In Mayo I, a district judge of the
District of Minnesota determined the director of the residency program at Mayo
Foundation for Medical Education and Research (Mayo Foundation) in Rochester,
Minnesota, was the “overall ‘boss’” of the residents in that program, and thus the
Mayo Foundation was the residents’ employer. Mayo I, 282 F. Supp. 2d at 1012-13.
The fact the government was unsuccessful in arguing the hospitals employed the
residents in the Mayo Foundation residency program did not preclude the government
from making a similar argument about a different residency program in a different
case before a different district court. One district court is not bound by the decision
or reasoning of another district court involving other parties with the same issue. See
also 26 U.S.C. § 7430(c)(4)(B)(iii) (“In determining . . . whether the position of the
United States was substantially justified, the court shall take into account whether the

                                          -7-
United States has lost in courts of appeal for other circuits on substantially similar
issues.” (emphasis added)).

       Finally, appellants claim the government was not substantially justified in
taking the position that CFM did not qualify as a “school, college, or university” for
purposes of the student exception because CFM was designated as a hospital and
medical research organization rather than an educational institution for charitable
contribution purposes under 26 U.S.C. § 170(b)(1)(A)(ii) and (iii). Having reviewed
the government’s brief in support of summary judgment, the parties’ arguments, and
the relevant statutory provisions and regulations, we conclude the government’s
position was substantially justified because “it ha[d] a reasonable basis in both law
and fact.”7 Kaffenberger, 314 F.3d at 960.

       The district court did not abuse its discretion in determining appellants were not
entitled to attorney fees with respect to the government’s second summary judgment
motion and opposition to appellants’ summary judgment motions.

III.   CONCLUSION
       We affirm.
                           ______________________________




       7
       Effective April 1, 2005, the IRS regulations incorporate 26 U.S.C.
§ 170(b)(1)(A)(ii)’s definition of an educational institution into the definition of a
school, college, or university. See 26 C.F.R. § 31.3121(b)(10)-2(c).

                                          -8-
