UNITED STATES of America, Plaintiff-Appellee, v. DETROIT MEDICAL CENTER, Defendant-Appellant.
No. 15-1279
United States Court of Appeals, Sixth Circuit.
Argued: June 15, 2016. Decided and Filed: August 17, 2016.
833 F.3d 671
For all of the above reasons, I concur in the lead opinion.
ARGUED: Thomas D. Sykes, Gould & Ratner LLP, Chicago, Illinois, for Appellant. Deborah K. Snyder, United States Department of Justice, Washington, D.C., for Appellee. ON BRIEF: Thomas D. Sykes, Gould & Ratner LLP, Chicago, Illinois, for Appellant. Deborah K. Snyder, Gilbert S. Rothenberg, Richard Farber, United States Department of Justice, Washington, D.C., for Appellee.
BEFORE: BATCHELDER, GIBBONS, and SUTTON, Circuit Judges.
OPINION
SUTTON, Circuit Judge.
I.
The parties have been here before. In the first round, the Detroit Medical Center disclaimed any duty to pay FICA taxes (short for Federal Insurance Contributions Act taxes, which fund Social Security and Medicare benefits) on the stipends paid to its medical residents. We remanded the case to the district court to determine whether the residents amounted to “students” under the Center‘s residency program, making them eligible for the student exemption from the FICA tax obligation. United States v. Detroit Med. Ctr., 557 F.3d 412 (6th Cir. 2009). In 2010, before the district court had a chance to resolve the issue, the IRS issued an administrative ruling that medical residents were students, exempting them (and their employers) from FICA taxes for tax periods prior to April 1, 2005. In the aftermath of this ruling, the Center and the IRS settled the dispute. Or so it seemed.
The IRS agreed to issue refunds to the Center for 1995-1997, 2001-2004, and the first quarter of 2005. For each of those twenty-nine taxable quarters, the IRS sent two checks to the Center: one for the employer portion of the FICA tax, the other for the employee portion of the FICA tax. The checks consisted of tax refunds and interest set by
After it received the refund checks, the Center filed a motion to reinstate the case, seeking $9.1 million in additional interest on the employer portion refunds. Even though it was incorporated under Michigan law, it maintained that it should not be regarded as a “corporation” under
II.
In construing legislation, courts begin with the language of the statute. That approach, quite rightly, confirms the centrality of text to statutory interpretation. But it also explains why some statutory-interpretation opinions have difficulty holding the interest (and the comprehension) of the reader. To respect the first imperative sometimes creates tension with the second.
Consider our task today. The question at hand sounds simple enough: Should a nonprofit corporation be treated like a for-profit corporation when it comes to the interest it receives on overpaid taxes? Now consider the question in the context of the Internal Revenue Code:
(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.
...
(c) Increase in underpayment rate for large corporate underpayments
(1) In general
For purposes of determining the amount of interest payable under section 6601 on any large corporate underpayment 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 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.
What starts as a basic question gets less basic the more one reads. Yes, this is a tax case. Some complexities—different rules for overpayments and underpayments, different interest rates for different taxpayers, some exceptions to some rules—come with the territory. But the first sign that the author of this provision was not thinking of his readers appears in the parenthetical of the flush paragraph: “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.‘” The meaning of this exception turns on a cross reference to another subsection that applies to the opposite form of payment mentioned in the first subsection but only for “C corporation[s],” not “corporations” in general.
At the risk of creating undue suspense, we‘ll start by ignoring the exception. In other words, we‘ll consider how the tax overpayment rules in general apply to Detroit Medical Center, and after that we‘ll consider whether the exception alters that conclusion.
Here, to repeat, is the general rule from
(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).
The statute creates a dichotomy between overpayments by “a corporation” and by all other taxpayers, with corporations receiving a lower interest rate on their overpayments than everyone else. Incorporated under Michigan law, the Detroit Medical Center is by every relevant measure a corporation, meaning it receives the lower interest rate.
The first way of measuring this conclusion is not as helpful as one might hope. Since 1918, the Code has included a definition of “corporation.”
In the absence of any statutory definition to the contrary, courts assume that Congress adopts the customary meaning of the terms it uses. Morissette v. United States, 342 U.S. 246, 263, 72 S.Ct. 240, 96 L.Ed. 288 (1952). For centuries, courts have permitted charitable organizations to be treated as corporations. See Edmund Seymour, The Historical Development of the Common Law Conception of the Corporation, 51 Am. L. Reg. 529 (1903). So firm is the foundation on which this principle rests that Chief Justice Marshall‘s invocation of it in Dartmouth College—permitting a college to be treated as a corporation—might have been called cliché in 1819. Two centuries earlier, in 1612, Sir Edward Coke wrote that a charitable hospital and school founded at the London Charterhouse was as valid a corporation as any other because it possessed all the characteristics that are of the es
By 1819, no one could be surprised that Chief Justice Marshall‘s definition of “corporation” would cover nonprofit institutions such as Dartmouth College: “an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.” Dartmouth College, 17 U.S. at 636. By 1833, Justice Joseph Story was piling on when he wrote that charitable corporations may take the corporate form to the same degree as for-profit, commercial corporations:
It is wholly immaterial, in such cases, whether the corporation take for their own private benefit, or for the benefit of other persons. ... A charter to a bank, or insurance, or turnpike company, is certainly a contract, founded in a valuable consideration. But it is not more so, than a charter incorporating persons for the erection and support of a hospital for the aged, the sick, or the infirm, which is to be supported by private contributions, or is founded upon private charity.
3 Joseph Story, Commentaries on the Constitution § 1386 (1833). Because the common law understanding of “corporation” has consistently included nonprofit corporations like Detroit Medical Center, it is fair to infer that the Internal Revenue Code uses the term in that same sense in
New and old dictionary definitions of corporation come to the same place. One dictionary after another defines “corporation” in a way that includes nonprofit entities. The Oxford English Dictionary is one: “A body corporate legally authorized to act as a single individual; an artificial person created by royal charter, prescription, or act of the legislature, and having authority to preserve certain rights in perpetual succession.” Oxford English Dictionary (2d ed. online version 2016). Webster‘s Second International is another: “A body politic or corporate formed and authorized by law to act as a single person, and endowed by law with the capacity of succession. ... The definition most commonly accepted by judicial decision in the United States is that of the Dartmouth College Case. ... Lay corporations may be: eleemosynary corporations, those created for charitable purposes; and civil corporations, those formed for temporal purposes, and comprising public or municipal, corporations.” Webster‘s New International Dictionary 596 (2d ed. 1934). And Black‘s Law Dictionary is still another, whether one looks to an older definition: “An artificial person or legal entity created by or under the authority of the laws of a state or a nation ... ordinarily consisting of an association of numerous individuals, who subsist as a body politic under a special denomination, which is regarded in law as having a personality and existence distinct from that of its several members.” Black‘s Law Dictionary (2d ed. 1910). Or to a newer one: “a group or succession of persons established in accordance with legal rules into a legal or juristic person that has a legal personality distinct from the natural persons who make it up, exists indefinitely apart from them, and has the legal powers that its constitution gives it.”
Proof that Congress used the generic definition of “corporation” in
So too in other parts of the Code.
O‘Neill v. United States, 410 F.2d 888 (6th Cir. 1969), bolsters this conclusion. We held that “a corporation created under state law is a corporation within the meaning of” the Code. Id. at 899. Any doubt about our conviction on this score was removed when we referred elsewhere to state law incorporations as the “definitional lodestar” of a corporation under the Code. Id. at 895. The Detroit Medical Center, as it acknowledges, is a state law corporation. Yes, the precise question at hand in O‘Neill was whether a for-profit
All of this puts the Detroit Medical Center at the bottom of a steep hill when it comes to showing that the term “corporation” in
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.”
As the Center sees it, the definitional parenthetical takes the reader to subsection (c)(3), and that subsection applies to tax payments by a “C corporation.” Hence, concludes the Center, if a corporation makes a tax overpayment, the lower interest rate applies to the refund only if the entity is a C corporation—a type of for-profit corporation. In the Center‘s words, “the type of ‘corporation’ specified by (a)(1) is the type of corporation embedded in and specified by (c)(3): a ‘C corporation.‘” Appellant‘s Br. 14.
We disagree with this interpretation, innovative though it is. 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 definition of “taxable period” appears in subsection (c)(3)(B), it is true, and the parenthetical cross-reference refers to subsection “(c)(3).” But this kind of imprecision is not unheard of in the Internal Revenue Code. Look no further than this section. Section 6621(c)(1) says: “For purposes of determining the amount of interest payable under section 6601 on any large corporate underpayment for periods after the applicable date, paragraph (2) of subsection (a) shall be applied by substituting ‘5 percentage points’ for ‘3 percentage points,‘” (emphasis added). If we should expect Congress to mention the most precise subsection in each cross-reference, it should have mentioned
If the parenthetical phrase defines all of the preceding phrase, taking in “overpayment of tax by a corporation” and “taxable period” by way of (c)(3), another problem arises. Presumably the definition in (c)(3) that would cover “overpayment of tax by a corporation” is “large corporate underpayment,” the only other term defined in (c)(3). The definition of “large corporate underpayment” in (c)(3), however, is a two-part definition, applicable to an underpayment made by a C corporation for more than $100,000. If “overpayment of a tax by a corporation” means the same thing as “large corporate underpayment” in (c)(3) (substituting overpayment for underpayment) then the overpayment would have to be (1) made by a C corporation, and (2) for more than $100,000. But Congress in
Nor is the Medical Center correct that the default meaning of “corporation” is C corporation throughout the Internal Revenue Code. Appellant‘s Br. 31. For one, the general definition of corporation covers nonprofit corporations, going back to Dartmouth College and beyond. For another, that approach does not work. If Congress generally intends unadorned references to “corporations” to be read as meaning “C corporations,” the first reference to “corporation” in
The Medical Center persists that the Internal Revenue Code‘s definition of “S corporation” shows that the word corporation by itself generally refers to a C corporation. In a section entitled “S Corporation defined,” the Code says two things: (1) that an S corporation means “a small business corporation” that has made an S corporation election under
Nor does the like-manner canon, formally known as the in pari materia canon, help Detroit Medical Center. In English, the canon says that words dealing with the same matter in the same statute should be given the same meaning. Mertens v. Hewitt Assocs., 508 U.S. 248, 260, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993). The Center inverts the canon in invoking it here. It asks us to treat the same matters throughout the Internal Revenue Code differently and different matters within one section the same. It implores us to treat the use of the word “corporation” in
In claiming that the parenthetical cross-reference provides definitions for both “corporation” and “taxable period,” the Center is half right. Subsection (c)(3) defines two phrases: “large corporate underpayment” and “taxable period.” But it does not define “corporation.” And one would not expect to find the definition of “corporation” in the definition of “large corporate underpayment,” as the definition of a genus usually does not appear in the definition of the species.
No doubt, it is strange that Congress reduced the interest rate on overpayments for all corporations, whether for profit or not. We have considerable sympathy for the Medical Center on this score. Congress has created a regime in which a nonprofit hospital receives a lower interest rate on its FICA tax overpayments than Warren Buffett does on his individual tax returns. Perhaps Congress did not think about the point. Nonprofit corporations after all do not pay income tax, and most tax overpayment issues usually arise in the context of income taxes, as opposed to the automatic withdrawal regime associated with FICA taxes. And perhaps if Congress thinks about the point, it will alter the rule. But for now, we have a statute that by any conventional method of interpretation does not provide relief for the Detroit Medical Center. “Our unwillingness to soften the import of Congress’ chosen words even if we believe the words lead to a harsh outcome is longstanding.” Lamie v. United States Tr., 540 U.S. 526, 538, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004).
The Medical Center overreaches in purporting to identify another oddity. Under the government‘s position, it says, “only one type of entity enjoys the standard rate of interest on underpayments (subsection (c)) while simultaneously receiving a lower, non-standard (reduced) rate of interest on its overpayments (subsection (a)(1)): a charitable organization that happens to have been organized as a not-for-profit corporation.” Appellant‘s Br. 39-40 (emphasis omitted). But the factual predicate of this claim is not true. An S corporation is in the same position. It would receive the standard rate (3%) for underpayments and the non-standard lower rate (2% and 0.5%) for overpayments as a “corporation.” And a C corporation would be in the same position as well if its underpayment was less than $100,000. Some of the asymmetries in the provision by the way benefit nonprofit corporations. If a nonprofit corporation underpays its taxes by more than $100,000, it would not be subject to the same higher interest rate of 5% as a C corporation. It would just have to pay the standard 3%.
We take some comfort in the reality that the Second Circuit, in a thoughtful opinion by Judge Lynch, faced this same issue and reached the same conclusion. Maimonides Med. Ctr. v. United States, 809 F.3d 85 (2d Cir. 2015). In doing so, it made many points that by now ought to be familiar: The word “corporation” “ordinarily refers to both for-profit and nonprofit entities,”
For these reasons, we affirm.