Opinion
Civ. A. No. C-87-0174-0(CS).
October 31, 1989.
B. Carlton Neat III of Ewen, MacKenzie Peden, Louisville, Ky., and John J. Slattery, Jr. of Kentucky Educational Ass'n, Frankfurt, Ky., for plaintiffs.
Joe Whittle and Suzanne Warner, for U.S. Atty., W.D.Ky.
Stewart D. Gibson, for Tax Div. of U.S. Dept. of Justice.
MEMORANDUM
The sole issue to be decided in this case is whether local boards of education in the state of Kentucky are "agencies or instrumentalities" of the State of Kentucky within the meaning of 26 U.S.C. § 3121(u)(2)(D)(i). As I read Kentucky law, local boards of education are not "agencies or instrumentalities" of the State of Kentucky for the purpose of 26 U.S.C. § 3121(u)(2)(D)(i).
The plaintiffs are the Board of Education of Muhlenberg County, Kentucky, and 108 teachers who are currently employed by the Muhlenberg Board. Before July 1, 1986, all the teachers had been employed by either the Board of Education of the Greenville Independent School District or the Board of Education of the Central City Independent School District.
In February 1986, the Greenville Board and the Central City Board approved agreements under which they would be merged into the Muhlenberg Board, effective July 1, 1986. Thus, beginning on July 1, 1986, the teachers became employed by the Muhlenberg Board.
In 1986, Congress voted to extend Medicare coverage to all state and local employees, who previously had been exempt from that coverage, and to impose on them and their employers the taxes which are levied to pay for the Medicare program. 26 U.S.C. §§ 3101(b) and 3111(b). Congress decided to extend that coverage gradually, however, and created the "continuing employment exception," which exempted from Medicare coverage and taxation individuals who were performing substantial and regular services for remuneration for an employer prior to April 1, 1986, continued to be employed by that employer after March 31, 1986, and did not enter into the employment relationship for the purpose of avoiding the Medicare tax. 26 U.S.C. § 3121(u)(2)(C).
On July 7, 1986, Martha Belwood, the Executive Director of the Kentucky State Office for Social Security, informed the Muhlenberg Board that the teachers who previously worked in the Central City and Greenville districts would be considered newly hired employees of the Muhlenberg Board and subject to withholding for payment of the Medicare tax. On November 9, 1987, the Muhlenberg Board and the teachers filed suit against the United States claiming that the teachers fell within the continuing employment exception and thus should not be subject to the Medicare tax.
The parties in this case agree that the teachers were employed by the Greenville and Central City Boards prior to April 1, 1986, and that they did not enter into that employment relationship for the purpose of avoiding Medicare coverage. The parties also agree that after the merger agreement, effective July 1, 1986, the teachers became employed by the Muhlenberg Board.
The continuing employment exception applies only if the state or local employees remain employed by the same employer after April 1, 1986, as they did before that date. The legal dispute in this case, therefore, is whether the teachers continued to be employed by the same employer so as to qualify for the continuing employment exception under 26 U.S.C. § 3121(u)(2)(C).
In determining whether a state or local employee has been employed by a single employer for purposes of the continuing employment exception, 26 U.S.C. § 3121(u)(2)(D)(i) states that "[a]ll agencies and instrumentalities of a State (as defined in section 218(b) of the Social Security Act) or of the District of Columbia shall be treated as a single employer." In addition, "[a]ll agencies and instrumentalities of a political subdivision of a State (as so defined) shall be treated as a single employer and shall not be treated as described in clause (i)." 26 U.S.C. § 3121(u)(2)(D)(ii).
The Muhlenberg Board and the teachers argue that all school boards in Kentucky are "agencies or instrumentalities" of the state, such that they constitute a single employer pursuant to 26 U.S.C. § 3121(u)(2)(D)(i). The United States, conversely, argues that a school board is a "political subdivision" of the state, such that each school board is a separate employer pursuant to 26 U.S.C. § 3121(u)(2)(D)(ii).
Whether school boards in Kentucky are "agencies or instrumentalities" of the State of Kentucky, within the meaning of 26 U.S.C. § 3121(u)(2)(D)(i), or "political subdivisions" of the State, within the meaning of 26 U.S.C. Section 3121(u)(2)(D)(ii), is an issue of Kentucky state law. From a review of the applicable case law, it is clear that though local school boards may perform some state functions, they are political subdivisions and not agencies of the state.
The most relevant authority for this proposition is the recent case of Board of Education of the Russellville Independent Schools v. Logan Aluminum, Inc., 764 S.W.2d 75 (Ky. 1989). Logan Aluminum involved the issue of whether jurisdiction to hear a challenge to the utility gross receipts tax imposed by Kentucky school districts pursuant to KRS 160.613 lies in the Kentucky Board of Tax Appeals or in the local circuit courts. The Kentucky Board of Tax Appeals is "an administrative review agency" created pursuant to KRS 131.310, which is vested with exclusive jurisdiction to "hear and determine appeals from final rulings, orders and determinations of any agency of state or county government affecting revenue and taxation." Id. at 76, citing KRS 131.340(1). In determining whether the Kentucky Board of Tax Appeals had jurisdiction, therefore, the Kentucky Supreme Court's decision rested on whether local school districts were agencies of the state. Id. at 77. The court found that the Kentucky Board of Tax Appeals did not have jurisdiction because local school districts were not state agencies. Id. at 78.
The Kentucky cases and statutes show that a local board of education is closer to a city or municipality than to a state agency. Local boards of education in Kentucky have powers and responsibilities similar to cities, and also have a similar degree of independence. In addition, the Sixth Circuit has held that a local board of education in Kentucky is not a state agency. See Cunningham v. Grayson, 541 F.2d 538 (6th Cir. 1976). Accordingly, local boards of education in Kentucky are not "agencies or instrumentalities" of the state within the meaning of 26 U.S.C. § 3121(u)(2)(D)(i).
In the legislative history to the continuing employment exception, Congress recognized that defining employers as state or local entities may pose a difficult problem in a particular case, and explained the distinction as follows:
It should be generally true that employees who move between different jobs in integral units of a State government, such as different departments within the State government, would be considered continuously employed by the State, while employees who move from State government to a job with a local township, county or municipality, or vice versa, would be considered to be newly hired. The Committee expects that cases in which the distinctions are more difficult to make will be judged according to the independence of the second employing unit from the first, as an employer.
H.R. Rep. No. 99-241, 99th Cong. 2d Sess. 1, pp. 26-27 (1986), U.S. Code Cong. Admin.News 1986, pp. 42, 604, 605.
Applying Congress' intent to this case, it is clear that for the purposes of this statute the merger of two political subdivisions creates a new employer. Thus, the Muhlenberg Board must be considered a separate and distinct employer, independent of the Greenville and Central City Boards which employed the teachers prior to July 1, 1986. The teachers, therefore, were employed by a different employer after the merger took place. Because local boards of education in Kentucky are not "agencies or instrumentalities" of the state pursuant to 26 U.S.C. § 3121(u)(2)(D)(i), the teachers could not qualify for the continuing employment exception under 26 U.S.C. § 3121(u)(2)(C).
Accordingly, summary judgment is granted in favor of the United States and a judgment will be entered.