Hospital Data Center of SC v. United States, 610-77.

• Decision Date: 10 September 1980
• Docket Number: No. 610-77.,610-77.
• Citation: Hosp. Data Ctr. of S.C. v. United States, 225 Ct.Cl. 158, 634 F.2d 541 (Fed. Cl. 1980)
• Parties: HOSPITAL DATA CENTER OF S. C., INC. v. The UNITED STATES.
• Court: U.S. Claims Court

634 F.2d 541

HOSPITAL DATA CENTER OF S. C., INC. v.The UNITED STATES.

No. 610-77.

United States Court of Claims.

September 10, 1980.

William McB.Wood, Grier, S.C., attorney of record, for plaintiff; James L. Underwood, Columbia, S.C., and Edwards, Wood, Duggan & Reese, Grier, S. C., of counsel.

Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen., M. Carr Ferguson, Washington, D. C., for defendant; Theodore D. Peyser, Jr., Washington, D. C., of counsel.

Before DAVIS, Judge, SKELTON, Senior Judge and NICHOLS, Judge.

ON PLAINTIFF'S AND DEFENDANT'S MOTIONS FOR SUMMARY JUDGMENT

DAVIS, Judge.

This case has to do with a 1976statute, Pub.L. 94-563,90 Stat. 2655,26 U.S.C. § 3121(k)(4)(1976), validating retroactively the payment by a non-profit organization of social security taxes for 1974-1976.Plaintiff, Hospital Data Center of S.C., Inc., is a non-profit computer service center owned by six county hospitals in South Carolina.It has been exempt from federal income tax under section 501(a), (c)(3) and (e) of the Internal Revenue Code of 1954, as a designated cooperative hospital service organization, and was also able to claim exemption from social security taxes.Nevertheless, taxpayer filed Employer's Quarterly Federal Tax Returns for the period from the second quarter of 1974 through the second quarter of 1976, and also paid over for that period its employees' FICA (Federal Insurance Contributions Act) taxes as well as its own FICA taxes.Before enactment of Pub.L.No. 94-563, supra, plaintiff was not required to pay these social security taxes unless it formally waived its tax exemption.However, taxpayer did not at the time file with the Internal Revenue Service such a waiver of its tax exempt status, nor did it file the required list of employees concurring in such a waiver (which was also necessary if tax was not to be imposed on the employees).Despite the fact that it was not legally liable for the taxes, plaintiff paid them, it is said because of inadvertence or mismanagement.

Taxpayer has brought this suit to recover the FICA taxes paid on its own behalf (the employees' share of the taxes was not included in the petition).¹Its efforts to obtain refunds of the FICA taxes for the nine quarters from the second quarter of 1974 through the second quarter of 1976 have been thwarted by Pub.L.No. 94-563, which became law in October 1976 and made plaintiff liable for those taxes.Taxpayer's sole contention is that the statute is improperly retroactive as applied to its social security taxes through the second quarter of 1976.²

Pub.L.No. 94-563 provided that taxpayers like plaintiff should be deemed to have filed a waiver certificate.The statute added a new section 3121(k)(4) to the Revenue Code which (with 1977amendments) provided that where a tax exempt organization —

(1) had not filed a waiver as of October 19, 1976(the date of enactment of Pub.L.No. 94-563),

(2) but had paid over social security taxes for a minimum of three consecutive quarters, with the last quarter being the third quarter of 1973 or a subsequent designated quarter, and

(3) had not received a refund or credit of any of the taxes paid after the third quarter of 1973, prior to September 9, 1976, nor had its employees received such a refund, then the tax exempt organization is to be deemed to have filed a waiver certificate and the pertinent employee information on the first day of the quarter for which the organization started paying the tax.

The result for plaintiff is that, by statute, it had in effect filed a waiver and given its list of concurring employees for the whole period for which taxpayer now seeks a refund.Admittedly, as we have said, plaintiff cannot recover if the statute is valid because the Act made it taxable on social security taxes for the period for which it sues.

The reasons for Pub.L.No. 94-563, and for its obvious retroactivity, became clear from its background and history.The first thing to note is that the imposition of social security taxes on non-profit organizations and their employees has long been troubling, and has led to rather frequent statutory changes.In 1950 the Senate favored compulsory taxation of non-profit organizations and their workers, except for religious organizations, S.Rep.No. 1669, 81st Cong., 2d Sess., 6, 15-16, 138-39(1950), 1950-2 Cum.Bull. 302, 303, 308-09, 342, while the House of Representatives sought compulsory taxation of the employee and voluntary taxation of the non-profit employer.H.R.Rep.No. 1300, 81st Cong., 1st Sess., 12(1949), 1950-2 Cum.Bull. 255, 260.The then statute compromised by extending initial coverage and concomitant taxation so long as the organization consented and two-thirds of the employees agreed.Social Security Act Amendments of 1950, § 204(a)(9)(B), 64 Stat. 477, 531, amendingsection 1426(b)(9)(B) of the Internal Revenue Code of 1939.In 1958, Congress modified the two-thirds requirement by splitting the organization's employees into two groups-the first where the workers were already covered by a retirement system and the second where they were not.Social Security Amendments of 1958, § 405(a), 72 Stat. 1013, 1044-45, adding section 3121(k)(1)(E) to the 1954 Code.At the same time Congress enacted a waiver certificate system to be effective twenty quarters retrospectively.Id.In 1960Congress removed the requirement of consent of two-thirds of the workers.Social Security Amendments of 1960, § 105(a), 74 Stat. 924, 942, amendingsection 3121(k)(1)(A) of the 1954 Code.

It has some importance for this case that this 1960legislation also dealt with cases like the present in which the excise taxes were paid over by the non-profit organization but it failed to file a waiver certificate or the employees' signature list, or where an employee had not signed the employees list.Id. at 943-44, § 105(b).Responding to its recognition of the fact that many non-profit organizations had paid and remitted the social security taxes but had failed to file the appropriate waiver or signature list and that employees had not adhered to the list, Congress allowed retrospective coverage so long as the employee made a request for coverage and the employer filed a waiver certificate.³Id.

Similarly, the 1976legislation at issue here (Pub.L.No. 94-563, supra) was Congress's response to a special situation comparable to that in 1960, only much worse.For whatever reason a considerable number of non-profit organizations had been paying social security taxes without filing the required waivers-ranging in amount from $118 million to $369 million-and many employees of these entities considered that they were covered by social security (even though in fact the taxes could be refunded, and coverage removed or lessened, because of the incorrect payment).The IRS considered that it had a duty to notify the organizations and the employees of this situation-and to pay refunds if asked to do so.The estimated drain on the social security funds could be from over 100 million to perhaps one billion dollars.In addition, if the organizations refused to be covered, a number of their employees then receiving benefits would lose their present entitlement, and a great number of others would lose their coverage and expectancy of future benefits.⁴

These are by no means trivial spurs toward acting to protect both the social security funds and a considerable number of employees of non-profit organizations.⁵Added to these components was the undeniable fact that a very large number of organizations had voluntarily elected to pay the taxes without compulsion, and that their non-liability for the taxes which they had paid was their own failure, neglect or refusal to file the necessary waivers and lists.⁶There was an emergency of sorts, created by these paying but exempt organizations, combined with the great likelihood that they would now seek refunds.⁷Congress was not acting to collect a tax from persons who at all previous times considered themselves free from it; rather it sought to validate the payment of a tax already made and deposited by taxpayers in the Treasury.

Still another element was the long-standing and frequent changeability of Congress's attitude toward the payment of social security taxes by non-profit organizations-a fact of life which should have been known to this plaintiff as well as to its peers.Comparably to the income tax, the imposition of social security taxes on exempt non-profit organizations (and their employees) had been for some time subject to rather frequent reconsideration and change in Congress.⁸

We must apply, to this situation, a general standard of all-around fairness when we decide whether Congress could or could not act retroactively.There is no direct constitutional prohibition against retroactive or retrospective civil tax legislation.⁹The guiding principle, stemming from the due process clause, is that retroactive application is forbidden only where it is "harsh and oppressive," considering the "nature of the tax and the circumstances in which it is laid * * *."Welch v. Henry,305 U.S. 134, 147, 59 S.Ct. 121, 125, 83 L.Ed. 87(1938).Recently we said, in the same vein, that "retroactivity questions cannot be given simplistic answers, but require analysis of the fairness of the provision under all the circumstances."Estate of Downs v. United States,215 Ct.Cl. 44, 48, 564 F.2d 48, 50(1977).¹⁰

Here, we cannot say that constitutional fairness was violated in 1976 by Pub.L.No. 94-563.Plaintiff and many others like it had paid the tax, although they had not filed waivers or lists, and were therefore entitled to refunds.What Congress did was to take away from these taxpayers their then right to a refund which existed because of their failure to file the waivers and lists.In effect, Congress retrospectively determined that, for those who had voluntarily paid the tax, waivers and lists were unnecessary-having...