Wichita Center for Graduate Medical Education, Inc. et al v. USA

Filing 30

MEMORANDUM AND ORDER denying 24 Motion to Certify Class. Signed by Chief Judge J. Thomas Marten on 12/21/2016. (sz)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

WICHITA CENTER FOR GRADUATE MEDICAL
EDUCATION,
Plaintiff,

vs.

Case No. 16-1054-JTM

UNITED STATES OF AMERICA,
Defendant.

MEMORANDUM AND ORDER

On March 2, 2010, the IRS determined that medical residents were eligible for the
student exception to Federal Insurance Contributions Act (FICA) taxes for tax periods
ending before April 1, 2005. Previously, the IRS and some taxpayers had been in dispute
as to whether medical residents were eligible for the exception. For each taxpayer who had
submitted an administrative claim over the issue, the IRS sent instructions on how to obtain
a refund. For employers seeking a refund of their portion of medical resident wage taxes,
the IRS required each taxpayer to have timely filed an administrative claim with the IRS
prior to 2010.
After receiving refunds, some employers have sued the United States for
overpayment interest under Internal Revenue Code § 6621, which sets one interest rate for

corporations and a second, higher interest rate for all other taxpayers. 26 U.S.C. § 6621(a).
These not-for-profit corporate employers, including the plaintiff in the present action,
argue they should have received interest at the second, higher rate. Several recent
decisions have rejected this conclusion. See United States v. Detroit Medical Center, 833 F.3d
671, 677 (6th Cir. 2016) (“We disagree with this interpretation, innovative though it is”);
Maimonides Med. Ctr. v. United States, 809 F.3d 85 (2d Cir. 2015) (§ 6621 includes nonprofit
entities); Medical College of Wisc. Affil. Hosp. v. United States, 2016 WL 4916811, *2 (E.D. Wisc.
Sept. 14, 2016) (“Although the Hospital's policy arguments for a higher interest rate for
refunds to nonprofits have merit, those arguments are better aimed at Congress.”).
The present action was brought by plaintiff Wichita Center for Graduate Medical
Education, Inc. (WCGME), located in Kansas, as well as two West Virginia corporations,
Charleston Area Medical Center (CAMC) and CAMC Health Education and Research
Institute (CHERI). The two groups of plaintiffs were postured differently with respect to
the history of their claims for refunds.
The IRS first paid WCGME interest at the higher, noncorporate rate, and later
demanded WCGME return the $2.3 million reflecting the difference in the two rates.
WCGME repaid this amount in 2013, and now seeks a refund of this amount. WCGME had
filed administrative claims over the issue prior to the IRS’s 2010 decision, and a claim for
additional interest on February 4, 2015.
The IRS paid CAMC and CHERI interest at the lower, corporate rate. The Complaint
alleges that before 2010, CAMC and CHERI filed administrative claims seeking FICA tax
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and “statutory interest,” but otherwise does not allege the making of any specific claim as
to the correct rate for such interest.
By separate Order (Dkt. 17), the court denied the motion of the government to
dismiss the action, which argued that, pursuant to the Tucker Act, 28 U.S.C. § 1346(a)(2),
claims for statutory interest exclusively lie before the Federal Court of Claims. The court
concluded that district courts have concurrent jurisdiction to entertain claims for unpaid
interest as a claim for “any sum” under 28 U.S.C. § 1346(a)(1). However, the court also
found that such claims are subject to the venue requirements of 28 U.S.C. § 1402(b)(2), and
dismissed without prejudice the claims of CAMC and CHERI.
The matter is now before the court on WCGME’s motion seeking to certify a
nationwide class of nonprofit corporations which have received FICA tax refunds with
interest at the lower, corporate rate. The proposed class does not distinguish between
employers, like WCGME, which have received interest income at the higher, noncorporate
rate only to have to return the difference to the IRS, and other employers, like CAMC and
CHERI, which have only received interest at the lower, corporate rate. In addition, the
proposed class is not restricted to employers who have previously filed an administrative
claim with the IRS or otherwise explicitly asserted a claim to the higher, noncorporate
interest rate.
The court hereby denies the motion for certification. This court has jurisdiction to
entertain claims for unpaid interest under § 1346, but such claims are subject to the
jurisdictional prerequisite of an administrative claim under Internal Revenue Code § 7422.
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See Oatman v. Dept. of Treasury–Internal Revenue Service, 34 F.3d 787, 789 (9th Cir.1994) (“The
district court lacks jurisdiction over claims for refunds pressed by any potential class
members who have not satisfied the procedural requirements of 26 U.S.C. §§ 6532 and
7422.”). Such claims must also be filed within the limitations period established by Internal
Revenue Code 6532(a)(1).
Administrative claims must “set forth in detail each ground upon which a credit or
refund is claimed and facts sufficient to apprise the Commissioner of the exact basis
thereof.” 26 C.F.R. § 301.6402-2(b)(1). The requirement for timely administrative claims was
created “to advise the appropriate officials of the demands or claims intended to be
asserted, so as to insure an orderly administration of the revenue, to provide that refund
claims are made promptly, and to allow the IRS to avoid unnecessary litigation by
correcting conceded errors.” United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 11
(2008).
WCGME, relying on the Sixth Circuit’s decision in The E.W.Scripps Co. v. United
States, 420 F.3d 589, 597-98 (6th Cir. 2005), argues that actions for unpaid interest under §
1346(a)(1) are not subject to the requirement for administrative claims recognized in § 7422.
In its prior Order, the court cited E.W.Scripps in the course of reaching its ultimate
conclusion that district courts were empowered to hear claims for unpaid interest under
§ 1346. (Dkt. 22 at 7). However, it does not follow that such claims may be advanced in the
absence of a prior administrative claim. Indeed, in the same portion of its prior opinion, the
court also observed that a claim under Section 1346 is subject to “the jurisdictional
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precedent of filing an administrative claim.” Id.
Section 7422(a) expressly requires the filing of an administrative claim prior to the
filing of any suit:
No suit or proceeding shall be maintained in any court for the recovery of any
internal revenue tax alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority,
or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Secretary,
according to the provisions of law in that regard, and the regulations of the
Secretary established in pursuance thereof.
(Emphasis added).
The court finds no basis for treating an “any sum” claim for unpaid interest under
Section 1346 to be free from the jurisdictional requirement of an administrative claim which
applies to claims for “any sum” under Section 7422. Indeed, the court is constrained to hold
otherwise in light of Wyodak Res. Dev. Corp. v. United States, 637 F.3d 1127 (10th Cir. 2011).
Although the specific question at issue in Wyodak was not the same as that presented here
—the relative meaning of the term “internal revenue” in Sections 1346 and 7422 — the
Tenth Circuit’s conclusion is directly relevant: both statutes should be construed in close
harmony.
Both 26 U.S.C. § 7422 and 28 U.S.C. § 1346 use the phrase "internal revenue
tax" (or in the latter case "internal-revenue tax"), and in both instances, the
language was added by the Revenue Act of 1921, Pub.L. No. 67–98, 42 Stat.
227. See tit. XIII, § 1318, 42 Stat. at 315 (predecessor of 26 U.S.C. § 7422); tit.
XIII, § 1310(c), 42 Stat. at 311 (predecessor of 28 U.S.C. § 1346). Absent some
very good reason to conclude that Congress intended the phrase
"internal-revenue tax" to have two different meanings within the very same
act, such a tortured interpretation should be avoided. Neither the Sixth
Circuit nor Wyodak has provided such a reason. We conclude that the phrase
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"internal-revenue tax" must mean the same thing in 28 U.S.C. § 1346 as it
does in 26 U.S.C. § 7422.
637 F.3d at 1131.
Of particular relevance, the Tenth Circuit also indicated disapproval of the earlier
Sixth Circuit decision in Horizon Coal Corp. v. United States, 43 F.3d 234 (6th Cir. 1994),
which was later cited by the Sixth Circuit in E.W.Scripps to support its further conclusion
that § 1346 suits are not subject to any jurisdictional prerequisite. The Tenth Circuit wrote:
Although we announce this rule for the first time, we note that our
interpretation best harmonizes existing case law on § 1346(a)(1) and its
interaction with related statutes. First, by providing a uniform interpretation
of the phrase “internal revenue” as between § 1346 and 26 U.S.C. § 7422,
those statutes seamlessly interlock in the manner intended by Congress. By
using the same definition in both statutes, the provisions work together to
require that all tax refund claimants seeking relief in district court must first
exhaust their administrative remedies with the Secretary of the Treasury. The
contrary construction adopted in Horizon Coal and by the district court below
would create a class of claims over which district courts possessed
jurisdiction regardless of exhaustion. See 42 F.3d at 239–40.
637 F.3d at 1135.
WCGME argues that the detailed requirements for administrative claims reflected
in Section 6511“simply cannot be applied to ... claims for additional statutory interest,”
because such a requirement could serve to effectively preclude a recovery of interest in
many instances. (Dkt. 29, at 6). Even though this may be true as a practical matter in many
instances, this requirement for the submission of an administrative claim is jurisdictional
in nature.
“Filing the claim is a jurisdictional prerequisite to bringing suit pursuant to §

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1346(a)(1).” Amoco Prod. Co. v. United States, 1988 WL 9112, *2 (N.D. Ill. Feb. 5, 1988).
Moreover,
the language in § 7422(a) is identical to the language of § 1346(a)(1). See
Vishnevsky v. United States, 581 F.2d 1249, 1251 (7th Cir.1978). Thus, any cause
of action properly before this court pursuant to § 1346(a)(1) also must satisfy
the jurisdictional prequisite [sic] of a timely administrative claim in
accordance with § 7422(a). Plaintiff did not satisfy this prequisite [sic]; it has
not filed a claim with the Internal Revenue Service. This court lacks
jurisdiction under § 1346(a)(1) because either (a) the interest allegedly due is
not “any sum” under § 1346(a)(1) or (b) the suit falls under § 1346(a)(1) but
there is no jurisdiction because no administrative claim has been filed.
Id. Congress created the statutory regime which waives sovereign immunity as to claims
for unpaid interest. Concerns as to the practical effect of this regime must be directed to
Congress, rather than this court.
In addition to its jurisdictional argument, the government also contends that the
proposed class does not meet the standard for certification under Fed.R.Civ.Pr. 23, and that
in any event the specific venue provisions noted in the earlier decision of the court would
preclude certification. The court finds that it need not resolve these arguments. Because the
court does not have jurisdiction to entertain the claims of the requested class, the plaintiff’s
motion is hereby denied.
IT IS ACCORDINGLY ORDERED this 21st day of December, that the plaintiff’s
Motion for Certification (Dkt. 24) is hereby denied.
___s/ J. Thomas Marten______
J. THOMAS MARTEN, JUDGE

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