In Charleston Area Medical Center Inc., et al v. United States, No. 1:17-cv-01528 (Ct. Cl. 2018) the Court of Federal Claims held that the interest rate applicable to corporations applies to tax exempt corporations just as it does for “regular” corporations. The court decided the case on the pleadings because the issue presented in the case was purely a legal issue with no factual dispute. Steve wrote about this issue a couple of years ago. There have been several cases decided since then making it worth a second trip for readers though for taxpayers the courts still play the same tune.
The case also raises interesting procedural issues because the taxpayer sought to bring the suit as a class action. Class action litigation does not occur often in federal taxes.
Taxpayer is a tax exempt organization in West Virginia. The taxpayer is a medical and research center. It had medical residents working for it and paid employment taxes for these residents before the IRS made an administrative determination that medical residents qualified for the student exemption. As a result it sought and received a refund for the overpayment of tax. The IRS refunded the money with interest; however, the interest paid by the IRS was computed on the basis for the corporate rate specified in IRC 6621(a)(1)(A)-(B) which provides “[t]he overpayment rate established under this section shall be the sum of … the Federal short-term rate… plus…3 percentage points (2 percentage points in the case of a corporation).”
The taxpayer argued that the corporate rate should not apply to it because Congress did not intend that rate to apply to tax exempt entities. In addition to arguing that the corporate rate did not apply to it, the taxpayer filed a class action complaint seeking to represent other similarly situated organizations that also received refunds pursuant to the IRS concession regarding the student exception.
As mentioned above, the taxpayer did not win the race to the court on this issue. By the time the Court of Federal Claims wrote its opinion here the government had already prevailed in the Second (Maimonides Med. Ctr. V. United States, 809 F.3d 85, 87 (2nd Cir. 2015) (this is the case Steve discussed in the earlier post)), Sixth (United States v. Detroit Med. Ctr., 833 F.3d 671(6th Cir. 2016)) and Seventh Circuits (Med. Coll. Of Wis. Affiliated Hosps., Inc. v. United States, 854 F.3d 930, 933 (7th Cir. 2017)) as well as the District Court in Kansas No. 16-1054 (D. Kan. 2017) appeal docketed, No. 18-3016 (10th Cir. Feb. 2, 2018)).
The Federal Circuit, following the reasoning of the other courts, found that the word corporation ordinarily refers to both for-profit and nonprofit entities. It noted that the dictionary definition of corporation does not depend on whether the entity is for profit or not for profit. IRC 7701 provides a broad definition of corporation. The Federal Circuit found that a textual analysis supports the view that Congress knew how to limit the type of corporation since it created a special rate specifically for large C corporations in IRC 6621(c)(3)(A). Finally, the court noted that throughout the Code the word corporation applies to for profit and not for profit corporations.
The court noted that the taxpayer’s argument relied on regulations superseded in 1996. It said that the language of the Code provided a clear basis for its decision but that even if it had not the long ago superseded regulations would not lead to the conclusion sought by the taxpayers. Additionally, taxpayers argued that the IRS position in their case (and the many identical cases preceding it) was inconsistent with Notice 2018-37 which announced that S corporations will receive unfavorable tax treatment notwithstanding the fact that the new statute excepts all corporations from such treatment. The court says that it takes no position regarding the proposed regulations but finds this argument has no bearing on the outcome of the case.
I do not know how many other tax exempt corporations will try the arguments made here. It appears that the issue is dead. It’s time for the tax exempt organizations to move to the lobbying phase of their efforts to obtain additional interest. Continuing to make this argument looks like a sure loser. Because the court dismissed the case, it did not get to the issue of certifying a class action against the IRS to recover a refund of interest for similarly situation tax exempt organizations.