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Interest on S Corp Tax Overpayments Is Calculated at Corporate Rate Rather Than Higher Individual Rate.

(Parker Tax Publishing August 13, 2015)

Interest on S corporation tax overpayments is computed at the corporate tax overpayment rate and not the higher rate applicable to individuals. Eaglehawk Carbon, Inc. v. U.S., 2015 PTC 240 (Fed. Cl. 2015).

Eaglehawk Carbon, Inc. is a mining company. Along with four other mining companies, Eaglehawk successfully sued the IRS for a refund of additional interest on coal sale excise tax overpayments made in tax years 1990 through 1996. All five companies are S corporations. The initial tax refunds on which the interest was calculated were made in 2009. The mining companies and the IRS agreed that the relevant provision under which interest on tax overpayments is calculated is Code Sec. 6621(a)(1).

Code Sec. 6621(a)(1) provides that the overpayment rate for interest is the sum of the federal short-term rate (STR) determined under Code Sec. 6621(b), plus 3 percentage points (2 percentage points in the case of a corporation). The flush language to Code Sec. 6621(a)(1) provides that, to the extent that an overpayment of tax by a corporation for any taxable period (as defined in Code Sec. 6621(c)(3), applied by substituting "overpayment" for "underpayment") exceeds $10,000, then "0.5 percentage point" is substituted for "2 percentage points". Code Sec. 6621(c)(3)(A) provides that the term "large corporate underpayment" means any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.

The mining companies argued that the history of various changes to Code Sec. 6621 and the fact that Code Sec. 6621(c) contains different treatment of C corporations and S corporations regarding underpayment interest showed that Congress could not have treated C and S corporations the same in Code Sec. 6621(a)(1) for the purposes of determining overpayment interest.

The Court of Federal Claims agreed with the IRS and held that, pursuant to the language of Code Sec. 6621(a)(1), the corporate overpayment interest rate formulas set forth in Code Sec. 6621(a)(1) apply to S corporations as well as C corporations. The court said that its reading of the statute was supported by its plain text as well as the canon of statutory construction known as the doctrine of the last antecedent. Neither the statute's legislative history nor IRS administrative materials, the court observed, provided support for a contrary interpretation. According to the court, the mining companies were asking it to infer that the text of Code Sec. 6621(a)(1) meant not what it said, but instead expresses a general concern for S corporations that has been present over the years in Code Sec. 6621(c). The court characterized this argument as a faulty premise that the intent of Congress should be inferred from the enactment of disparate legislative measures over the course of a number of years.

The court noted that, of the relevant legislative acts amending Code Sec. 6621(a)(1), none had legislative history containing any direct reference to S corporations. Nor was there any reference to the difference between S corporations and C corporations, or to the impact of the amendments to Code Sec. 6621(a)(1) on S corporations or pass-through entities in general. Thus, the court said, the mining companies had no clear statement of congressional intent with which they could persuade the court to ignore the plain text of Code Sec. 6621(a)(1).

For a discussion of rates used to compute interest on tax overpayments, see Parker Tax ¶261,520. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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