08 August 2018 Court holds that nonprofit medical center is a corporation for purposes of calculating interest on tax overpayment refunds In Charleston Area Medical Center, Inc., et al v. US, No. 17-1528T (Fed. Cl. July 31, 2018), the US Court of Federal Claims has held that a non-profit medical center incorporated under state law is a corporation for purposes of Section 6621(a)(1), and, therefore, should receive the lower interest rate applicable thereunder to corporations on refunds of tax overpayments. Charleston Area Medical Center (CAMC) and the CAMC Health Education and Research Institute (CHERI) are non-profit corporations. Although generally exempt from income tax under Section 501, they are required to pay the taxes imposed on employers under the Federal Insurance Contributions Act (FICA). In 2010, the IRS determined that certain medical residents that CAMC and CHERI had treated as employees were covered under the "student exception" to FICA under Section 3121(b)(10) for tax periods ending before April 1, 2005. As a result, CAMC and CHERI were entitled to refunds for overpayments of the employer-portion of FICA tax attributable to the medical residents, plus interest. Under Section 6621(a)(1), the interest rate on tax overpayments is 2% in the case of a corporation and 3% in the case of other taxpayers. The IRS applied the corporate rate to the FICA refunds for CAMC and CHERI, which amounted to over $2 million in overpayment interest. In 2017, CAMC and CHERI filed a class action complaint alleging that they (and other nonprofit corporations in similar circumstances) should have been paid interest on the tax overpayments at the higher rate applicable to non-corporate taxpayers. The government and CAMC/CHERI filed cross-motions for summary judgment on the purely legal issue of which interest rate applies to non-profit corporations under Section 6621(a)(1). The court noted that the issue of whether non-profits entities incorporated under state law are corporations for purposes of Section 6621(a)(1) is not an issue of first impression. It explained that the Second, Sixth and Seventh Circuits, as well as the US District Court for the District of Kansas, have all held that incorporated non-profit entities are corporations for purposes of Section 6621(a)(1). The court in the current case agreed that "corporation" under Section 6621 includes non-profit entities. The court noted, consistent with the Second Circuit, that the common law understanding of corporation includes both for-profit and non-profit entities. Similarly, the dictionary definition of "corporation" does not restrict the term to for-profit entities. In addition, the Internal Revenue Code's definition of "corporation" in Section 7701 does not exclude non-profit entities. The court further noted that another subsection of Section 6621 specifically qualifies "corporation" by referring to a "C corporation" — which Congress did not do in Section 6621(a). Moreover, the court added that there are numerous instances throughout the Internal Revenue Code where "corporation" (without any qualification) refers to both for-profit and non-profit entities. Accordingly, the court determined that both common usage and statutory provisions support understating "corporation" to include non-profit entities. CAMC and CHERI based their argument on now-superseded regulations known as the "Kintner Regulations," which described essential characteristics of corporate entities. The court found this argument unconvincing because: (1) courts do not look to regulations when the statute itself is clear; (2) the Kintner Regulations were repealed and superseded in 1996 by regulations that harmonize with the statute; and (3) the Kintner Regulations applied to businesses that were not incorporated under any state's law and thus would be inapplicable to the case at hand. CAMC and CHERI further argued that certain recently-issued IRS guidance, describing regulations to be issued in connection with the Tax Cuts and Jobs Act, suggests an interpretation of "corporation" different than that being argued by the government in the current case. However, the court declined to give weight to whether the IRS might take a position contrary to the statute in yet-to-be-issued regulations — when the plain meaning of the term and statute support the interpretation that has been argued by the government and adopted by other courts. The court in Charleston Area Medical Center, Inc., et al v. US clarifies that tax-exempt organizations incorporated under state law are considered corporations for purposes of Section 6621(a)(1). This determination is consistent with other circuit and federal courts, as non-profits incorporated under state law have been similarly determined to be corporations in other jurisdictions for purposes of applying Section 6621(a). Consequently, exempt organizations incorporated under state law that are due a refund on tax overpayments should expect that the IRS will calculate the interest due with the refund at the lower corporate rate. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
Document ID: 2018-1595 | |||||||||||||||||
