Case: 13-50739   Document: 00512701002    Page: 1   Date Filed: 07/16/2014




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT   United States Court of Appeals
                                                  Fifth Circuit

                                                                      FILED
                                                                    July 16, 2014
                                No. 13-50739
                                                                    Lyle W. Cayce
                                                                         Clerk
UNIVERSITY OF TEXAS SYSTEM, on behalf of The University of Texas
Medical Foundation, The University of Texas Health Science Center at Tyler,
The University of Texas M.D. Anderson Cancer Center and The University of
Texas Medical Branch at Galveston; UNIVERSITY OF TEXAS SYSTEM
MEDICAL FOUNDATION,

                                          Plaintiffs - Appellants

UNIVERSITY OF TEXAS HEALTH SCIENCE CENTER AT SAN
ANTONIO,

                                          Cross Defendant - Appellant
v.

UNITED STATES OF AMERICA,

                                          Defendant - Appellee


                Appeal from the United States District Court
                     for the Western District of Texas


Before WIENER, HAYNES, and GRAVES, Circuit Judges.
HAYNES, Circuit Judge:
      The University of Texas System, on behalf of several of its subsidiary
medical institutions (collectively “UT”), sued the United States seeking refund
of the Social Security component of Federal Insurance Contributions Act taxes
it paid with respect to the service of medical residents in 2005. UT asserted
that the residents were exempt from Social Security taxes because they were
“students” under an agreement between the State of Texas and the
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Commissioner of Social Security. After the parties filed cross-motions for
summary judgment, the district court denied UT’s motion and granted
summary judgment for the United States, finding that the residents were not
students under the agreement. UT appealed. Because we conclude that UT’s
residents are not “students” within the meaning of the agreement between
Texas and the Commissioner of Social Security, we AFFIRM.
                   I. Statutory and Regulatory Background
      “Through the Social Security Act and related legislation, Congress has
created a comprehensive national insurance system that provides benefits for
retired workers, disabled workers, unemployed workers, and their families.
Congress funds Social Security by taxing both employers and employees under
[the Federal Insurance Contributions Act (“FICA”)] on the wages employees
earn.” Mayo Found. for Med. Educ. & Research v. United States, 

, 709 (2011) (citations omitted).       When Congress adopted the Social
Security Act in 1935, it excluded service performed by state employees from
coverage due to questions about whether it could compel state participation.
Bowen v. Pub. Agencies Opposed to Soc. Sec. Entrapment, 

, 44
(1986). In 1950, however, Congress enacted 42 U.S.C. § 418 (“Section 218” of
the Social Security Act), which allows states to voluntarily opt-in to the Social
Security system by entering into an agreement with the Commissioner of
Social Security. 

Through a “§ 418 or § 218 agreement,” as it is
commonly called, a state may define to a certain extent which state employees
participate in Social Security. See 

The Internal Revenue Code’s state
employee exemption incorporates the various state § 418 agreements by
excluding from FICA taxation “service performed in the employ of a State”




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unless that service is “included under an agreement entered into pursuant to
section 218 of the Social Security Act.” 26 U.S.C. § 3121(b)(7)(E). 1
      When opting in classes of employees through a § 418 agreement, states
may also employ exclusions in their agreement to ensure that specified subsets
of employees are not opted-in through the § 418 agreement. One of the optional
exclusions that a state may include within its § 418 agreement is for “service
performed by a student.”         42 U.S.C. § 418(c)(5).        Section 418(c)(5) cross
references the general student exclusion applicable to private employers in
§ 410(a)(10), which is defined as applying to “[s]ervice performed in the employ
of . . . a 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.” See § 418(c)(5); Minnesota v. Apfel, 

, 747 (8th Cir.
1998) (noting § 418(c)(5)’s cross reference to § 410(a)(10)).
      In 1978, the Commissioner of Social Security issued a ruling addressing
Arizona’s contention that medical residents were not employees because,
among other arguments, “they were students whose services were excluded
from coverage under [Arizona’s] section 218 agreement.” See SSR 78-3, 

(1978). The Commissioner of Social Security found the medical
residents were not excluded from coverage under the student exclusion in
Arizona’s    §   418   agreement,      explaining    that    “[t]he   Social   Security
Administration has always held that resident physicians are not students.” 

the Eighth Circuit declined to defer to the Social Security
Administration’s (“SSA”) ruling because it found it to be inconsistent with the
Social Security regulation at 20 C.F.R. § 404.1028(c), which applies the general



      1  Although not relevant to this appeal, this exemption does not apply to those
employees who are not participants in a state retirement system. See 26 U.S.C.
§ 3121(b)(7)(F). UT seeks refunds only with respect to medical residents who were members
of a Texas retirement system.
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student exclusion at 42 U.S.C. § 410(a)(10). 

. In response
to Apfel, the SSA issued an “Acquiescence Ruling,” stating that “[u]nder SSA
rules, the services performed by medical residents do not qualify for the
student exclusion,” but that the SSA would apply Apfel’s case-by-case approach
in the Eighth Circuit. SSAR 98-5(8), 63 Fed. Reg. 58,444, 58,446 (Oct. 30,
1998).
                     II. Factual and Procedural Background
        The State of Texas entered into a § 418 agreement in 1951. Texas’s
original § 418 agreement did not exclude service performed by a student. In
1998, Congress amended the Social Security Act to allow states to exclude
student services that were previously opted-in through a § 418 agreement. See
Act of October 21, 1998, Pub. L. No. 105-277, § 2023(a), 112 Stat. 2681.
Pursuant to that authorization, Texas amended its § 418 agreement in 1999 to
“exclude from coverage service performed after June 30, 2000, in the employ of
a school, college or university if such service is performed by a student who is
enrolled and regularly attending classes [there].” The modification applies to
“all student employees of the State of Texas,” including “student employees
of . . . The University of Texas System.”
        According to UT’s amended complaint, its medical institutions operate
medical residency programs that provide training for doctors who have
completed medical school (“residents”).      These residents “receive didactic
lessons (including ‘teaching rounds,’ lectures and procedural workshops) and
provide care for patients under the supervision of institution faculty,” regularly
working more than forty hours per week. Upon satisfactory completion of a
residency program and relevant board licensing examinations, residents
receive certification in their field of medicine from a national accreditation
body.


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       At the time Texas’s § 418 agreement was modified to exclude students
from coverage, UT was withholding the employee portion of FICA taxes as to
its residents and paying the employer portion of FICA taxes as to its residents.
After the addition of the student exclusion to Texas’s § 418 agreement, UT
continued to treat the residents as covered by Social Security by withholding
and paying FICA taxes. UT did not seek administrative refunds regarding its
residents until April 2008.
       In 2009, UT filed suit against the United States. Count two of UT’s
amended complaint sought a refund of Social Security FICA taxes paid as to
residents for the second, third, and fourth quarters of 2005 on the ground that
the residents were exempt under the student exclusion in Texas’s § 418
agreement. 2     The United States filed a crossclaim to recover an alleged
erroneous refund of FICA taxes regarding the University of Texas Health
Science Center San Antonio for the second, third, and fourth quarters of 2005.
       UT moved for summary judgment on count two, seeking a declaration
that a case-by-case approach applied to the determination of whether its
residents were “students” for purposes of the student exclusion in Texas’s § 418
agreement. The United States filed a cross-motion for summary judgment on
its crossclaim and count two of UT’s amended complaint, requesting that the
district court find, as a matter of law, that the medical residents employed by
UT are not students for purposes of FICA taxes or the student exclusion in
Texas’s § 418 agreement. The district court denied UT’s motion and granted
the government’s motion, supporting its holding on three alternative grounds:
(1) Treasury regulations, which include a full-time employee rule, governed
such that the residents were not students; (2) even assuming Social Security


       2 Counts one and three are not at issue in this appeal. Pursuant to the parties’ agreed
stipulation, the district court held count one in abeyance pending an administrative
resolution and dismissed count three with prejudice.
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                                 No. 13-50739
regulations governed, the residents were not students in light of the SSA’s rule
that medical residents are not students; and (3) even under a contractual
approach, the residents were not students under Texas’s § 418 agreement. The
district court entered final judgment pursuant to Federal Rule of Civil
Procedure 54(b), denying relief on count two of UT’s amended complaint and
granting relief on the United States’ crossclaim. UT timely appealed.
                           III. Standard of Review
      Summary judgment is appropriate when “there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.”
FED. R. CIV. P. 56(a). We review a grant of summary judgment de novo,
construing all facts and evidence in the light most favorable to the nonmovant.
See EEOC v. Chevron Phillips Chem. Co., 

, 615 (5th Cir. 2009).
                                IV. Discussion
      The parties’ arguments in this case track the district court’s three
alternative grounds for its holding. Consequently, as the third of their three
alternative arguments, both parties argue that even applying a contractual
analysis we should find in their favor. The parties do not explain why they
treat straightforward contractual interpretation as a fallback approach, nor do
they argue that this approach is a legally incorrect way to determine whether
resident service is included under Texas’s § 418 agreement. Because we hold
that a contractual analysis is the proper approach to the analysis in this
context and that under such an analysis UT’s medical residents do not fall
within the meaning of the term “student” as it is used in Texas’s § 418
agreement, we conclude that the district court’s grant of summary judgment
in favor of the United States was proper.
A. Contract Construction is the Proper Approach
      The applicable statutory text, Texas’s § 418 agreement, and the case law
indicate that Texas’s § 418 agreement is contractual in nature. UT invokes the
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state employee exemption in the Internal Revenue Code to argue that its
residents are exempt from FICA taxes.             See 26 U.S.C. § 3121(b)(7)(E).
According to the plain language of this exemption, service performed for a state
entity is not employment for purposes of FICA taxation unless that service is
“included under an agreement entered into pursuant to section 218 of the
Social Security Act [42 U.S.C. § 418].” 

U.S.C. § 418 provides
that the term “employment,” for purposes of the Social Security Act,
encompasses “service included under” a state’s § 418 agreement. § 418(a)(2).
In other words, the scope of the state employee exemption, in both the Internal
Revenue Code and the Social Security Act, is necessarily determined by the
scope of each individual state’s § 418 agreement: the dispositive issue in
discerning the extent of coverage is whether the service at issue is “included
under” an agreement. This suggests that construction of the applicable § 418
agreement is the proper approach for deciding the extent of coverage.
Furthermore, § 418 does not simply speak of the state designating whether it
wishes to participate in the Social Security program. Rather, § 418 provides
that “[t]he Commissioner of Social Security shall . . . enter into an agreement
with [a] State,” which will include such provisions as the state may request.
§ 418(a)(1). The relevant statutory text thus indicates that these agreements
between the SSA and the several states are contractual in their ability to
govern the obligations of the states and the SSA under the Social Security Act
and Internal Revenue Code.
      Additionally, Texas’s § 418 agreement appears to be a contract. It states
that the Social Security Administrator and the State of Texas “hereby
agree . . . to extend . . . the insurance system established by title II of the Social
Security Act” to the employees performing those services listed in the
agreement. It is signed by both the Commissioner of Social Security and the
Executive Director of the Texas Department of Public Welfare. It obligates the
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                                No. 13-50739
SSA to extend Social Security coverage to the services encompassed by the
agreement and obligates Texas to pay taxes on those services covered by the
agreement.
      The Supreme Court’s opinion in Bowen, 

, involving
California’s § 418 agreement, is instructive as well. California’s agreement
contained a provision, mirroring § 418(g), that allowed California to terminate
coverage previously opted-in through the agreement. 

However,
Congress amended § 418(g) to prohibit states from terminating coverage under
an agreement. 

California challenged the validity of the amendment,
arguing that it had a contractual right to terminate coverage and that the
amendment deprived it of this right without just compensation in violation of
the Fifth Amendment. 

Faced with this argument, the district court
construed the § 418 agreement as a contract, held that it created a contractual
right to withdraw from the Social Security System, and held that the
amendment was unconstitutional under the Fifth Amendment. 

      The Supreme Court reversed, but it did not do so on the basis that the
agreement was not a contract or should not be construed as a contract. Instead,
it held that Congress could modify the agreement since it reserved the right to
“alter, amend, or repeal any provision” of the Social Security Act and “the
Agreement expressly incorporated § 418, which of course was fully subject to
Congress’ reserved power of amendment.” 

(citation and internal
quotation marks omitted).      Seeming to assume that California’s § 418
agreement was a contract, the Court relied on the tenet that “contractual
arrangements, including those to which a sovereign itself is party, remain
subject to subsequent legislation by the sovereign.” 

(citation and
internal quotation marks omitted); see generally 

The Supreme
Court criticized the district court for “heed[ing] none of [the] Court’s often-
repeated admonitions that contracts should be construed, if possible, to avoid
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foreclosing exercise of sovereign authority.” 

–53. The Court thus
indicated that § 418 agreements are contracts, which are generally subject to
subsequent legislation by Congress. 3
       In the first of two alternative holdings in Apfel—the primary case urged
by UT—the Eighth Circuit likewise explained that “the Court in Bowen
actually assumed that [§ 418] agreements are 

. 4
The Eighth Circuit held that Minnesota’s § 418 agreement was to be construed
as a contract and that the parties’ intent was controlling. See 

(agreeing with the district court’s holding that Minnesota’s § 418 agreement
“was a contract and that its terms must be interpreted by giving effect to the
intent of the parties”). There, the “uncontroverted evidence demonstrated that
when the parties executed the modification [to Minnesota’s § 418 agreement],
they did not intend to extend coverage [of the agreement to pay taxes] to the
medical residents.” 

The Eighth Circuit’s primary holding was
therefore that Social Security coverage and associated tax withholding did not


       3 The Court’s holding that Congress could nullify the termination provision of § 418
agreements does not undermine the idea that the agreements are contractual in nature vis-
à-vis the relationship between the states and the implementing federal agencies—a concept
that the United States seemed to admit in Bowen. See Brief for the Appellants, Bowen v.
Pub. Agencies Opposed to Soc. Sec. Entrapment, 

(1986) (No. 85-521), 1986 U.S.
S. Ct. Briefs LEXIS 298, at *31 (“Section 418 agreements have a ‘contractual aspect’ that may
not be repudiated by the Secretary . . . .”); 

(“Section 418 and the agreements
consummated under its authority describe the conditions that govern state participation in
the Social Security System; federal and state administrative officials must comply with those
conditions, as they must with all aspects of federal law.”).
       4The Eighth Circuit explained:
       Although Bowen holds that section 418 agreements are subject to modification
       by Congress, it does not broadly dismiss such agreements as non-contractual.
       To the contrary, the Court’s decision is replete with references to contractual
       arrangements. Indeed, the backdrop against which the Court examined
       California’s assertions was that contracts should be construed, if possible, to
       avoid foreclosing exercise of sovereign authority. Thus, far from holding that
       section 418 agreements are non-contractual, the Court in Bowen actually
       assumed that such agreements are 

(citation and internal quotation marks omitted).
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extend to residents of the University of Minnesota given the parties’ mutual
intent to that effect. See 

       In light of these indications that a § 418 agreement is to be construed as
a contract between a state and a federal agency, we find it proper to take the
approach employed in the primary holding in Apfel. We therefore use contract
principles to construe the student exclusion in Texas’s § 418 agreement. 5
B. Applying Contract Principles to Texas’s § 418 Agreement
       “[O]bligations to and rights of the United States under its contracts are
governed exclusively by federal law.” Boyle v. United Techs. Corp., 

, 504 (1988); see also United States v. Seckinger, 

, 209–10
(1970).    Applying federal law in the contract context includes looking to
“principles of general contract law” that can be found in treatises or
restatements of the law. Franconia Assocs. v. United States, 

,
141–42 (2002) (citation and internal quotation marks omitted); see also Mobil
Oil Exploration & Producing Se. v. United States, 

, 607–08 (2000);

.
       The overarching consideration in interpreting an agreement is to give
effect to the principle purpose of the agreement as understood in light of the
agreement as a whole and all the circumstances. See RESTATEMENT (SECOND)
OF CONTRACTS      § 202(1)–(2) (1981); see also 

–47 (holding


       5 A further reason for employing a contractual approach is that both the Social
Security regulation that UT argues governs and the Treasury regulation that the United
States argues governs indicate that they are inapplicable to service covered by a § 418
agreement. See 20 C.F.R. § 404.1028(a) (“For purposes of this section, a school, college, or
university . . . . does not . . . include any school, college, or university that is an
instrumentality or integral part of a State or a political subdivision of a State for which work
can only be covered by an agreement under section 218 of the Act.”); 26 C.F.R.
§ 31.3121(b)(10)-2(a)(2)(iii) (stating that it “shall not apply to services performed in the
employ of a school, college, or university of a State or a political subdivision thereof by a
student referred to in section 218(c)(5) of the Social Security Act (42 U.S.C. 418(c)(5)) if such
services are covered under the agreement between the Commissioner of Social Security and
such State entered into pursuant to section 218 of such Act”).
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that a § 418 agreement “must be interpreted by giving effect to the intent of
the parties”). The student exclusion in Texas’s § 418 agreement mirrors that
at 42 U.S.C. § 410(a)(10), thereby indicating that the parties intended to
incorporate the Social Security Act’s general student exclusion. 6                     This
understanding by itself, however, does not resolve whether the parties
intended for the student exclusion in Texas’s § 418 agreement to apply to
residents, since § 410(a)(10) does not actually define the term “student” or
answer whether medical residents are students. Cf. 

(holding that the almost identical language at 26 U.S.C. § 3121(b)(10) “does
not define the term ‘student,’ and does not otherwise attend to the precise
question whether medical residents are subject to FICA”). 7 The scope of the
term “student” must be considered within the context of the specific agreement
or statute before the court. See 

(“We do not doubt that . . .
residents are engaged in a valuable educational pursuit or that they are
students of their craft. The question whether they are ‘students’ for purposes
of § 3121, however, is a different matter.”). Here, any initial uncertainty as to



       6 The agreement also states that its terms are in conformity with § 418, and, as
explained supra, § 418(c)(5) cross-references the general student exclusion in § 410(a)(10).
       7    We need not embrace the district court’s approach of concluding that medical
residents are not “students” in general. On this point, UT rightfully argues that the term
“student” can encompass medical residents; indeed, we have described residents as
“students” in other legal contexts. E.g., Shaboon v. Duncan, 

, 729–33 (5th Cir.
2001). Nevertheless, as the United States points out, that medical residents have been
considered “students” in some legal contexts does not compel an identical result in this case
where the issue is the meaning of the term within Texas’s § 418 agreement. In fact, the
Supreme Court has found it reasonable to conclude that medical residents are not “students”
in the closely analogous context of the general student exclusion in the Internal Revenue
Code. See 

(holding that it is not irrational to conclude “that these
doctors—who work long hours, serve as highly skilled professionals, and typically share some
or all of the terms of employment of career employees—are the kind of workers that Congress
intended to both contribute to and benefit from the Social Security system” (citation and
internal quotation marks omitted)). The parties’ arguments simply underscore the fact that
the term “student,” devoid of any other context, does not unambiguously encompass or
exclude medical residents. See 

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whether UT’s medical residents are students within the meaning of Texas’s
§ 418 agreement is resolved through further application of general principles
of contract law.
      At the time when the student exclusion was added to Texas’s § 418
agreement in 1999, the SSA clearly disclosed its understanding that medical
residents did not fall within the meaning of the term “student” as that term is
used in the student exclusion that states could incorporate into their § 418
agreements. A 1978 Social Security Ruling explained that the SSA “has always
held that resident physicians are not students.” SSR 78-3, 

(1978). In 1998, the SSA unsuccessfully advocated in favor of this meaning in

. Shortly after the decision in Apfel, the SSA reaffirmed
its understanding that “[u]nder SSA rules, the services performed by medical
residents do not qualify for the student exclusion.” SSAR 98-5(8), 63 Fed. Reg.
58,444, 58,446 (Oct. 30, 1998). The SSA also made clear that it would employ
the case-by-case approach used in Apfel only in regard to “Federal-State
agreements for coverage and subsequent modifications under section 218 of the
Act involving Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota
or South Dakota.” 

occurred prior to Texas adding the student
exclusion to its § 418 agreement.
      UT does not point to any evidence that Texas understood the student
exclusion to carry a different meaning than that held by the SSA at the time
the agreement was amended. More decisively, to the extent that Texas defined
the student exclusion differently from the SSA’s well-disclosed meaning, there
was no reason for the SSA to know this as Texas did not disclose any such
contrary meaning. In this circumstance, it is hornbook contract law that the
well-disclosed meaning of the SSA governs as opposed to any undisclosed
meaning that Texas might have held. See United States v. Stuart, 

, 367 n.7 (1989) (“It is hornbook contract law that the proper construction
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                                    No. 13-50739
of an agreement is that given by one of the parties when ‘that party had no
reason to know of any different meaning attached by the other, and the other
had reason to know the meaning attached by the first party.’” (quoting
RESTATEMENT (SECOND) OF CONTRACTS § 201(2)(b))); see also 5 MARGARET N.
KIFFIN, CORBIN ON CONTRACTS § 24.5 (Joseph M. Perillo, ed. 2014). 8
      The parties’ course of performance likewise indicates that UT’s medical
residents do not fall within the student exclusion in Texas’s § 418 agreement.
“[G]reat weight” should be given to the fact that UT repeatedly paid and
withheld FICA taxes on its residents after the student exclusion was added to
Texas’s § 418 agreement in 1999. RESTATEMENT (SECOND) OF CONTRACTS
§ 202(4) (“Where an agreement involves repeated occasions for performance by
either party with knowledge of the nature of the performance and opportunity
for objection to it by the other, any course of performance accepted or
acquiesced in without objection is given great weight in the interpretation of
the agreement.”); see also 5 MARGARET N. KIFFIN, CORBIN ON CONTRACTS
§ 24.16. It was not until 2008 that UT objected to this performance under the
agreement by filing an administrative claim for a refund with the IRS. This
course of performance is thus strong evidence that the parties did not intend
for the student exclusion in Texas’s § 418 agreement to apply to UT’s medical
residents. Significantly, the inverse course of performance occurred in Apfel:
the University of Minnesota “had consistently treated the residents’ stipends
as excluded from coverage for more than thirty 

n.7.
The Eighth Circuit thus listed this factor as among the uncontroverted
evidence that the parties’ intended for the medical residents to be excluded
from coverage. 

& n.7.


      8   Notably, this contract construction principle could not be applied in the same
manner in Apfel. There, the student exclusion was added to Minnesota’s § 418 agreement in
1958, with SSR 78-3 not being issued until 1978. See 

.
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       In sum, the well-disclosed meaning given to the term “student” by the
SSA is confirmed by approximately eight years of conforming performance by
UT and is not contradicted by a contrary meaning disclosed by Texas at the
time of the agreement. These consistent manifestations of the parties’ mutual
intent compel the conclusion that UT’s medical residents are not students
within the meaning of the student exclusion in Texas’s § 418 agreement (and
we limit our holding to this particular context only). 9               See RESTATEMENT
(SECOND) OF CONTRACTS § 202(5) (“Wherever reasonable, the manifestations
of intention of the parties to a promise or agreement are interpreted as
consistent with each other and with any relevant course of performance, course
of dealing, or usage of trade.”). To borrow the language of the Supreme Court,
“[w]e do not doubt that [UT’s] residents are engaged in a valuable educational
pursuit or that they are students of their craft. The question whether they are
‘students’ for purposes of [Texas’s § 418 agreement], however, is a different
matter.” 

–16. As the Eighth Circuit concluded in its
primary holding in Apfel, we hold that the parties’ intent on this issue at the
time they modified the agreement is controlling. See 

. 10
Accordingly, summary judgment in favor of the United States was proper
because UT’s residents are not students within the meaning of the student
exclusion in Texas’s § 418 agreement.
       AFFIRMED.



       9 We do not address whether the services of other employees are included under
Texas’s § 418 agreement or whether medical residents are “students” in other legal contexts.
       10 Because we hold that contractual analysis is the proper approach and that under
such an analysis UT’s residents do not fall within the meaning of the term “student” as it is
used in Texas’s § 418 agreement, we do not go on to consider the applicability of 20 C.F.R.
§ 404.1028 as the Eighth Circuit did in its alternative holding in Apfel. 

–
48. For the same reason, we do not address 26 C.F.R. § 31.3121(b)(10)-2 as the United States
requests. See also supra note 5 (explaining that both regulations indicate that they are
inapplicable to service covered by a § 418 agreement).
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