The non-profit corporation in United States v. Detroit Medical Center, CA6, Case No. 15-1279, received a refund of payroll taxes along with interest on that overpayment from the IRS. However, the organization was dismayed to find that it had been interest at a lower rate than it had expected to be paid.
The IRS noted the group of hospitals was organized as a corporation under corporate law and paid the lower rate of interest provided in IRC §6621(a)(1) for a “large corporation.” That provision provides:
(a) General rule
(1) Overpayment rate
The overpayment rate established under this section shall be the sum of --
(A) the Federal short-term rate determined under subsection (b), plus (B) 3 percentage points (2 percentage points in the case of a corporation).
To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting "overpayment" for "underpayment") exceeds $10,000, subparagraph (B) shall be applied by substituting "0.5 percentage point" for "2 percentage points."
(2) Underpayment rate
The underpayment rate established under this section shall be the sum of --
(A) the Federal short-term rate determined under subsection (b), plus (B) 3 percentage points.
They noted that parenthetical reference in §6621(a)(1)(A) (“as defined in subsection (c)(3)…). Specifically, they noted that this cross reference found at IRC §6621(c)(3) makes reference to a “C corporation” and they are not such a corporation. The reference the organization referred to reads:
(3) Large corporate underpayment
For purposes of this subsection --
(A) In general
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.
(B) Taxable period
For purposes of subparagraph (A), the term "taxable period" means --
(i) in the case of any tax imposed by subtitle A, the taxable year, or
(ii) in the case of any other tax, the period to which the underpayment relates.
However, the Sixth Circuit Court of Appeals, agreeing with the holding of the Second Circuit in the case of Maimonides Med. Ctr. v. United States, 809 F.3d 85 (2d Cir. 2015), found that the cross reference did not limit the application of the lower rate to C corporations only.
The Court goes through an analysis of the cross reference and determines that the reference to IRC §6621(a)(1)(A) to IRC §6621(a)(3) refers only to the issue of the “taxable period” and not the type of corporation. The court notes:
The key problem is that the parenthetical most naturally modifies "taxable period," not "corporation." The "as defined" phrase appears closest to "taxable period," suggesting that this is what it is defining. Of all the terms that precede the parenthetical, moreover, "taxable period" is the only one "defined" in subsection (c)(3). There is no definition of corporation in subsection (c)(3). Also undermining this proposal is the reality that the definition of "taxable period" in (c)(3) refers to the word "underpayment" -- the term for which "overpayment" must be substituted under the exception. Subsection (c)(3)(B)(ii) then defines taxable period as, "in the case of any other tax, the period to which the underpayment relates." The parenthetical explains that, to get a definition of "taxable period" for the purposes of (a)(1)(B), the reader looks to its definition in (c)(3), "applied by substituting 'overpayment' for 'underpayment.'" That the definition of "taxable period" in (c)(3) includes the word "underpayment" shows that Congress sought to define "taxable period" by the cross-reference to (c)(3) in the flush language.
The Court then notes that the term “corporation” without a modifier generally throughout the IRC refers to all types of corporations (C corporations, S corporations and §501(c)(3) corporations) and, in fact, is why where this a special treatment there is always a modifier in front of corporation. In this case the Court concludes that Congress intended no such modifier and that a “large” corporation of any ilk will receive the lower interest rate on overpayments of tax—even payroll taxes for a non-profit corporation.