Charleston Area Med. Ctr., Inc. v. United States

• Decision Date: 17 October 2019
• Docket Number: 2018-2226
• Citation: 940 F.3d 1362
• Parties: CHARLESTON AREA MEDICAL CENTER, INC., CAMC Health Education and Research Institute, Inc., on behalf of Themselves and All Other Taxpayers Similarly Situated, Plaintiffs-Appellants v. UNITED STATES, Defendant-Appellee
• Court: U.S. Court of Appeals — Federal Circuit

940 F.3d 1362

CHARLESTON AREA MEDICAL CENTER, INC., CAMC Health Education and Research Institute, Inc., on behalf of Themselves and All Other Taxpayers Similarly Situated, Plaintiffs-Appellants

v.UNITED STATES, Defendant-Appellee

2018-2226

United States Court of Appeals, Federal Circuit.

Decided: October 17, 2019

Thomas D. Sykes, Law Offices of Thomas D. Sykes, LLC, Lake Forest, IL, argued for plaintiffs-appellants.

Jennifer Marie Rubin, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Deborah K. Snyder, Richard E. Zuckerman.

Before Lourie, O’Malley, and Chen, Circuit Judges.

O’Malley, Circuit Judge.

This case is about the interpretation of 26 U.S.C. § 6621(a)(1), which provides the interest rate that the Internal Revenue Service ("IRS") must use in calculating the amount of interest owed on a tax refund. Section 6621(a)(1) requires the IRS to apply a lower interest rate for refunds owed to "corporations" than for refunds owed to other types of entities. Charleston Area Medical Center, Inc. and CAMC Health Education and Research Institute (collectively, "the Taxpayers") applied for a tax refund arguing that they are entitled to the higher interest rate because they are nonprofit entities and not corporations. The IRS disagreed and applied the lower interest rate to calculate the refund owed to the Taxpayers. The U.S. Court of Federal Claims ("Claims Court") affirmed, reasoning that the Taxpayers, who are incorporated under state law, are corporations under § 6621(a)(1) notwithstanding their status as nonprofit entities. Charleston Area Med. Ctr., Inc. v. United States , 138 Fed. Cl. 626 (2018). The Taxpayers appeal.

Although this is an issue of first impression for our court, four other circuits have concluded that a nonprofit entity that is incorporated under state law is a corporation under § 6621(a)(1). Maimonides Med. Ctr. v. United States , 809 F.3d 85 (2d Cir. 2015) (" Second Circuit "); United States v. Detroit Med. Ctr. , 833 F.3d 671 (6th Cir. 2016) (" Sixth Circuit "); Med. College of Wis. Affiliated Hosps. v. United States , 854 F.3d 930 (7th Cir. 2017) (" Seventh Circuit "); Wichita Ctr. for Graduate Med. Educ., Inc. v. United States , 917 F.3d 1221 (10th Cir. 2019) (" Tenth Circuit "). While it is not unheard of for appellants revisiting questions previously considered by other courts to hit the circuit split jackpot, this is not such an instance. We agree with the interpretative path taken by our sister circuits—not because those decisions came first, but because they were correct. Therefore, we affirm.

I. LEGAL BACKGROUND

The central issue in this appeal is straightforward—does the word "corporation," as it appears in 26 U.S.C. § 6621(a)(1), include nonprofit entities that are incorporated under state law. But the simplicity ends there. As is often the case with issues involving the Internal Revenue Code ("Code"), the parties’ arguments rely on various authorities—including three provisions of the Code, two iterations of a Treasury regulation, and a notice of proposed rulemaking issued by the IRS on March 1, 2018. We detail each below.

A. Code Provisions

Section 6621(a)(1), the specific provision at issue in this appeal, recites:

(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".

Id. (emphases added). Section 6621(a)(1) provides that if the taxpayer is a corporation and its overpayment exceeds $10,000, the first $10,000 will bear interest at the Federal short-term rate plus two percentage points, and the remainder will bear interest at the Federal short-term rate plus one-half of a percentage point. If the taxpayer is not a corporation and its overpayment exceeds $10,000, the entire overpayment will bear interest at the Federal short-term rate plus three percentage points. Id. In plain English, a taxpayer’s refund is greater if the IRS applies the formula set out for noncorporations than if it applies the formula set out for corporations.

The sentence in § 6621(a)(1) beginning with the phrase "To the extent" is referred to as the "flush language." The flush language cross-references subsection (c)(3), which in turn, provides:

(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.

Id. (emphases added).

While § 6621 does not define "corporation" for purposes of that section, § 7701(a)(3) provides a Code-wide definition for the term:

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—

* * *

(3) CORPORATION The term ‘corporation’ includes associations, joint-stock companies, and insurance companies.

Id. (emphasis added).

B. Treasury Regulations

Treasury has promulgated different versions of regulations that attempt to classify various entities as corporations. The Kintner Regulations were enacted in 1960 and remained in effect through 1996, when they were superseded by the modern regulations on January 1, 1997. 25 Fed. Reg. 10,928 (Nov. 17, 1960) ; 61 Fed. Reg. 66,584 (Dec. 18, 1996). While in effect, the Kintner Regulations "aid[ed] in classifying business associations that were not incorporated under state incorporation statutes but that had certain characteristics common to corporations and were thus subject to taxation as corporations under the federal tax code." Littriello v. United States , 484 F.3d 372, 375 (6th Cir. 2007) ). These characteristics, under the regulations, included: "(i) [a]ssociates, (ii) an objective to carry on business and divide the gains therefrom, (iii) continuity of life, (iv) centralization of management, (v) liability for corporate debts limited to corporate property, and (vi) free transferability of interests." 25 Fed. Reg. at 10,929 –30.

The modern regulations attempted to simplify the entity classification rules. See 61 Fed. Reg. at 66,584 ("The existing regulations for classifying business organizations as associations (which are taxable as corporations under section 7701(a)(3)) or as partnerships under section 7701(a)(2) are based on the historical differences under local law between partnerships and corporations. Treasury and the IRS believe that those rules have become increasingly formalistic. This document replaces those rules with a much simpler approach that generally is elective."). Under these regulations, a corporation means, inter alia , "[a] business entity organized under a Federal or State statute ... if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic." 26 C.F.R. § 301.7701-2(b)(1).

C. Treasury’s Notice

On March 1, 2018, the IRS issued a notice regarding an entirely different section of the Code—Section 1061(c)(4)(A). Internal Revenue Service, IRS Bull. No. 2018-12 at 443, Guidance Under Section 1061, Partnership Interests Held in Connection with Performance of Services (Mar. 19, 2018) (hereinafter, "Notice"). Section 1061 generally concerns partnership interests held in connection with performance of services and excludes from the term "applicable partnership interest" "any interest in a partnership directly or indirectly held by a corporation." The Notice announces that the IRS and Treasury "intend to issue regulations providing guidance on the application of section 1061" and that "those regulations will provide that the term ‘corporation’ for purposes of section § 1061(c)(4)(A) does not include an S corporation." Id.

II. PROCEDURAL HISTORY

The Taxpayers are non-stock, not-for-profit, § 501(c)(3) organizations incorporated in and under the laws of West Virginia. Although generally exempt from federal income tax, the Taxpayers are not exempt from taxes on "wages" from "employment" under the Federal Insurance Contributions Act ("FICA"). "Employment" under FICA has a broad definition but excepts, for example, service performed in the employ of a school by a student who is regularly enrolled and attending classes at the same school. 26 U.S.C. § 3121(b)(10).

In 2010, the IRS administratively determined that medical residents fall within that exception to "employment" and applied this determination retroactively. The IRS issued tax refunds to the Taxpayers, who had paid FICA taxes on medical residents for twenty-nine quarterly tax periods during the 1995 to 2005 taxable years. The IRS paid interest on these tax refunds to the Taxpayers by applying the interest rate for corporations under § 6621(a)(1). The Taxpayers contend that, if the IRS had used the interest rate for noncorporations under § 6621(a)(1), they would have received approximately $1.9 million in additional statutory interest. The Taxpayers now seek to recover over $2 million in total—the $1.9 million in additional statutory interest plus interest. J.A. 2.

A. Related Case

The Taxpayers first filed an action with a third plaintiff, Wichita Center for Graduate Medical Education, in the District of Kansas on February 26, 2016. The district court ultimately dismissed the Taxpayers’ case for lack of venue, leaving Wichita Center as the only remaining plaintiff. Wichita Ctr. for Graduate Med. Educ. v. United...