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Nonprofit Hospital Was a Corporation for Purposes of Calculating Interest Rate on Overpayments

(Parker Tax Publishing May 2017)

The Seventh Circuit Court of Appeals affirmed a district court ruling that a nonprofit hospital was a corporation for purposes of determining the interest rate on a refund for an overpayment of tax. The court rejected the hospital's argument that a nonprofit corporation is not a corporation under Code Sec. 6621. Medical College of Wisconsin Affiliated Hospitals, Inc. v. U.S., 2017 PTC 192 (7th Cir. 2017).

Medical College of Wisconsin, a nonprofit corporation, received a refund of Social Security taxes after the IRS ruled that the medical residents, on whose behalf the taxes were paid, were exempt from such taxes until April 1, 2005. When the IRS refunded the overpayment it added approximately $13 million in interest. It later demanded $6.7 million back because it determined that it should have applied the lower interest rate that applies to overpayments by corporations. Medical College returned the funds and sued the IRS in district court to have them restored. The district court ruled in favor of the IRS (2016 PTC 355 (E.D. Wisc. 2016)) and Medical College appealed.

Code Sec. 6621 provides that the interest rate generally applicable to refunds of overpayments is the federal short-term rate plus three percentage points. The rate is lower if the taxpayer is a corporation. For corporations, the formula adds two percentage points for the first $10,000 of the overpayment and 0.5 percentage point for the portion in excess of $10,000.

Medical College argued that, as a nonprofit, it was not a corporation for purposes of Code Sec. 6621 and therefore the higher interest rate should have applied. It based its argument on Code Sec. 6621(c), which applies to large corporate underpayments. Under Code Sec. 6621(c)(3)(A), a large corporate underpayment is an underpayment by a C corporation that exceeds $100,000. Medical College argued this definition of a corporation as a C corporation also applied to Code Sec. 6621(a). To support this argument, the hospital cited the statutory rule of construction that a word means the same thing throughout a statutory section. According to Medical College, as a nonprofit, it was not a C corporation, and if it was not a C corporation, it was not a corporation under Code Sec. 6621(a).

The Seventh Circuit rejected this argument and affirmed the lower court ruling. The court noted that the same issue had been decided by the Second Circuit in Maimonides Medical Center v. U.S., 2015 PTC 456 (2d Cir. 2015) and by the Sixth Circuit in U.S. v. Detroit Medical Center, 2016 PTC 315 (6th Cir. 2016) and found those decisions persuasive.

First, the court disagreed with Medical College's conclusion that a nonprofit corporation is not a C corporation, pointing out that a C corporation is defined under Code Sec. 1361(a)(2) as any corporation that is not an S corporation. Even if Medical College was correct, however, the court did not agree that the definition of a corporation under Code Sec. 6621(a) was limited to a C corporation by Code Sec. 6621(c)(3)(A).

The court noted that Code Sec. 6621(c)(3)(A) does not purport to define "corporation." Rather, it defines "large corporate underpayment" as an underpayment of more than $100,000 by a C corporation. Code Sec. 6621(c)(3)(A), the court found, does not say or imply that every reference to "corporation" in Code Sec. 6621 is to a C corporation. Rather, in the court's view, the use of the word "corporation" in Code Sec. 6621(a) and "C corporation" in Code Sec. 6621(c)(3)(A) implies that a different meaning was intended. The court also called attention to the limiting language in Code Sec. 6621(c)(3), which states that its definitions apply "for purposes of this subsection," meaning that the reference to a C corporation applies only with regard to large corporate underpayments. Finally, the court also found it relevant that Code Sec. 6621(a) uses the definition of "taxable period" from Code Sec. 6621(c)(3). That this is the only reference in Code Sec. 6621(a) to Code Sec. 6621(c)(3) meant, in the court's view, that the rest of Code Sec. 6621(c)(3) applies only to large corporate underpayments, and not to an overpayment.

For a discussion of the interest rate applicable to overpayments and underpayments, see Parker Tax ¶262,110.

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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