Medical College of Wisconsin Affiliated Hospitals Inc v. United States of America

Filing 35

ORDER Granting Motion for Summary Judgment 19 and Denying Motion for Summary Judgment 22 signed by Judge Charles N Clevert, Jr on 9/14/16. (cc: all counsel) ((cef), C. N. Clevert, Jr.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
MEDICAL COLLEGE OF WISCONSIN
AFFILIATE HOSPITALS, INC.,
Plaintiff,
v.

Case No. 14-C-1477

UNITED STATES OF AMERICA,
Defendant.
ORDER GRANTING MOTION FOR SUMMARY JUDGMENT (DOC. 19)
AND DENYING MOTION FOR SUMMARY JUDGMENT (DOC. 22)
The Internal Revenue Code requires the Internal Revenue Service to pay interest
on taxpayer overpayments at one rate for corporations and a higher, alternative rate for
noncorporations. The Medical College of Wisconsin Affiliated Hospitals, Inc. overpaid its
Federal Insurance Contributions Act (FICA) tax and received a tax refund with interest
calculated at the rate for corporations. It filed this lawsuit to recover additional interest at
the higher, noncorporate rate. Cross-motions for summary judgment are now before the
court.
Summary judgment is proper if the depositions, documents or electronically stored
information, affidavits or declarations, stipulations, admissions, interrogatory answers or
other materials show that there is no genuine dispute of material fact and the moving party
is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a), (c); Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986).

The moving party bears the initial burden of

demonstrating it is entitled to summary judgment. Celotex, 477 U.S. at 323. Once this
burden is met, the nonmoving party must designate specific facts to support or defend

each element of its cause of action, showing that there is a genuine issue for trial. Id. at
322-24. In analyzing whether a question of fact exists, the court construes the evidence
in the light most favorable to the party opposing the motion. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 255 (1986). Because the parties in this case have filed cross-motions
for summary judgment, many facts are not contested. When no genuine issue of material
fact exists, the sole question is whether the moving party is entitled to judgment as a matter
of law. Logan v. Commercial Union Ins. Co., 96 F.3d 971, 978 (7th Cir. 1996).
The Hospital is, and was at all times relevant, organized and operated as a
nonstock, nonprofit corporation under Wisconsin law. (Doc. 18, ¶ 1.) Further, the Hospital
is, and was at all times relevant, a corporation exempt from federal income tax under 26
U.S.C., i.e., Internal Revenue Code (IRC), § 501(a) and (c)(3). (Doc. 18, ¶ 2.) The
Hospital is, and was at all times relevant, a corporation for purposes of qualifying as a taxexempt organization under § 501(a), (c)(3). (Doc. 18, ¶ 3.)
The Hospital filed a Form 990 for each of the relevant periods respecting its taxexempt operations.

For years after 2007, Form 990 asked about the form of the

organization, and on page one of the Form 990 for years after 2007, the Hospital checked
the box stating that its form of organization was “corporation.” (Doc. 18, ¶ 4.)
Generally, although the Hospital is exempt from paying federal income tax, it is not
exempt from paying FICA employment taxes. (Doc. 20, ¶ 1.) Prior to March 2, 2010, the
IRS and various taxpayers disagreed whether medical residents were exempted from the
FICA requirements for tax periods prior to April 1, 2005. (Doc. 20, ¶ 2.) The source of the
dispute revolved around the “student exception” to FICA. (Doc. 20, ¶ 3.) On March 2,

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2010, the IRS accepted the position that medical residents were students excepted from
FICA taxes for tax periods ending before April 1, 2005. (Doc. 18, ¶ 6.)
Based on that IRS determination, the Hospital received refunds of overpaid FICA
tax plus interest, for twenty-nine tax quarters. (Doc. 18, ¶ 7.) The IRS refunded to the
Hospital approximately $14 million in overpaid employer-portion FICA tax plus
approximately $13 million in interest on that tax. (Doc. 18, ¶ 8.) However, in 2013 the IRS
formally notified the Hospital that the IRS had overpaid the interest refunded and
demanded repayment of approximately $6.7 million. (Doc. 18, ¶ 9.) The IRS viewed the
approximately $6.7 million as equal to the difference between the statutory interest rates
for a corporation versus a noncorporation under IRC § 6621(a)(1). (Doc. 18, ¶ 10.) The
Hospital repaid the approximately $6.7 million in interest but said it was doing so under
protest. (Doc. 18, ¶ 12.) The Hospital then claimed a refund for the approximately $6.7
million in interest (plus interest thereon) (Doc. 18, ¶ 13) and now sues to recover it.
Under § 6621(a)(1) noncorporate taxpayers receive interest on tax refunds at a
higher rate than corporate taxpayers receive. Hence, the question here is whether for
purposes of IRC § 6621(a)(1) a § 501(c)(3) nonprofit is considered to be a corporation.
When the pending summary judgment motions were briefed initially, the identical legal
issue had been decided in the government’s favor by district courts in New York and
Michigan and presented on appeal to the Second and Sixth Circuits. Both circuit courts
have since issued their decisions affirming the judgments in the government’s favor.
This court has fully considered the parties’ arguments here, the statutory and
regulatory language cited, the opinions of the two district courts, the Second Circuit’s
Maimonides Medical Center v. United States, 809 F.3d 85 (2d Cir. 2015), the Sixth Circuit’s
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United States v. Detroit Medical Center, No. 15-1279, ___ F.3d ___, 2016 WL 4376431
(6th Cir. Aug. 17, 2016), the Court of Federal Claims’ Eaglehawk Carbon, Inc. v. United
States, 122 Fed. Cl. 209 (2015), and the Tax Court’s Garwood Irrigation Co. v.
Commissioner of Internal Revenue, 126 T.C. 233 (2006).

Because this court’s

determination is in accord with the decisions of the Second and Sixth Circuit, there is no
need to add a lengthy opinion to the mix. In short, this court rejects the Hospital’s
argument that the parenthetical in the “flush language” of § 66211 incorporates the “C
corporation” limitation of (c)(3)(A), notwithstanding that the flush language cites only
“(c)(3).” The flush-language parenthetical more naturally refers only to the definition of

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The pertinent part of IRC § 6621 reads:

(a) General rule—
(1) Overpaym ent rate.— The overpaym ent rate established under this section
shall be the sum of—
(A) the Federal short-term rate determ ined under subsection (b), plus
(B) 3 percentage points (2 percentage points in the case of a corporation).
To the extent that an overpaym ent of tax by a corporation for any taxable period (as
defined in subsection (c)(3), applied by substituting “overpaym ent” for
“underpaym ent”) exceeds $10,000, subparagraph (B) shall be applied by substituting
“0.5 percentage point” for “2 percentage points.”
(2) Underpaym ent rate.—The underpaym ent rate established under this section
shall be the sum of—
(A) the Federal short-term rate determ ined under subsection (b), plus
(B) 3 percentage points.
....
(c) Increase in underpaym ent rate for large corporate underpaym ents.—
(1) In general.— For purposes of determ ining the am ount of interest payable
under section 6601 on any large corporate underpaym ent for periods after the
applicable date, paragraph (2) of subsection (a) shall be applied by substituting “5
percentage points” for “3 percentage points”.
....
(3) Large corporate underpaym ent.— For purposes of this subsection—
(A) In general.— The term “large corporate underpaym ent” m eans any
underpaym ent of a tax by a C corporation for any taxable period if the am ount
of such underpaym ent for such period exceeds $100,000.
(B) Taxable period.— For purposes of subparagraph (A), the term “taxable
period” m eans—
(i) in the case of any tax im posed by subtitle A, the taxable year, or
(ii) in the case of any other tax, the period to which the underpaym ent
relates.

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“taxable period” in (c)(3)(B), especially as the flush language does not use the defined term
“large corporate underpayment” (or, as possibly adjusted, “large corporate overpayment”).
And this court is unpersuaded that perfect symmetry between the overpayment and
underpayment provisions was intended by Congress. Instead, it appears that where
Congress intended to use “C corporation” in § 6621 it did so and where it used only
“corporation” it included all corporations—C, S, and § 501(c)(3) together. Although the
Hospital’s policy arguments for a higher interest rate for refunds to nonprofits have merit,
those arguments are better aimed at Congress. Here the text of the statute expresses
Congress’s intent. For these reasons and the reasons discussed by the Second Circuit
and Sixth Circuit in Maimonides and Detroit Medical College.
IT IS ORDERED that the United States’ motion for summary judgment (Doc. 19) is
granted and the Hospital’s motion for summary judgment (Doc. 22) is denied.2
Dated at Milwaukee, Wisconsin, this 14th day of September, 2016.
BY THE COURT

/s/ C.N. Clevert, Jr.
C.N. CLEVERT, JR.
U.S. DISTRICT JUDGE

2

Although the court views with skepticism the governm ent’s argum ent that the Hospital should be
considered a C corporation in any event, no holding based on that argum ent need be m ade. Nor does the
court need to address the Hospital’s argum ents regarding the validity of or deference due various regulations,
as the text of the statute controls the outcom e here. To the extent that Garwood, 126 T.C. 233, found that
the flush language incorporated the reference to C corporations, this court disagrees.

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